Employment Taxes and Worker Classifications, Part II

Misclassification of Employees

Worker misclassification is a topic of much debate, and improperly classifying a worker may result in serious tax consequences for a company and its owners. In recent years, the Department of Labor (DOL) has been aggressively targeting certain industries (particularly construction, auto retail and janitorial) that it believes are violating payroll/employment tax laws.  For example, hiring workers as independent contractors rather than employees in order to reduce company costs and facilitate lower cost bids.

One such case occurred last spring, when subsequent to an extensive investigation of 16 defendants, the Department of Labor, U.S. Department of Justice and the State of Utah uncovered an extensive worker misclassification scheme. Working collectively, through three companies, the defendants tried to avoid payroll taxes and compliance with the Fair Labor Standards Act (FLSA) by requiring more than 1,000 construction workers in Utah and Arizona to become members/owners of limited liability companies rather than hire them as employees. This arrangement deprived the workers of federal and state wage and safety protection, including minimum wage, overtime, worker’s compensation and unemployment insurance.

In the case noted above, the court approved consent judgments requiring the defendants to:

  • Pay $600,000 in back wages and liquidated damages
  • Pay $100,000 in civil penalties
  • Honor their federal, state and local tax obligations
  • Refrain from using LLCs to circumvent FLSA compliance
  • Comply with all FLSA provisions regarding minimum wage, overtime, recordkeeping and anti-retaliation
  • Work with the DOL to identify all workers who were harmed by their tax scheme and to determine the proper payment they should receive

Worker misclassifications affect income tax withholding, social security and medicare (FICA), pensions, federal unemployment taxes (FUTA), unemployment insurance, worker’s compensation, worker expense reimbursement, benefits under the Patient Protection and Affordable Care Act, and more. The defendants’ attempt at utilizing legal partnerships to illegally avoid payroll taxes and reduce worker’s wages clearly did not go unnoticed by the authorities and brings to light the importance of properly classifying employees from the outset.

If you are worried that you have misclassified your employees, it is best to seek advice on how to remedy the situation in a manner that protects your rights while complying with the tax law.

Tax Planning for Individuals and Businesses

Moskowitz LLP is a full service tax and accounting firm that assists individuals and businesses in the full range of federal and state tax planning and litigation.  We can help you and your business legally minimize your tax liability without running afoul of employment tax and general tax laws.