Employer Liability for Misclassification of Workers
Gary Bertoni, a Portland attorney, was recently indicted for 10 counts of willful failure to remit federal employment taxes to the IRS. The indictment alleges that from 2009-2011 Bertoni failed to pay nearly $185,000 in payroll taxes to the IRS, used funds that were supposed to go to the IRS and to his employees’ health insurance and retirement accounts for personal expenses, and transferred more than $300,000 in withholdings to his personal bank account. If convicted, Bertoni faces a maximum fine of $2.5 million, restitution to the IRS and up to 50 years in prison.
The consequences of misclassifying workers
In nearly all cases, the penalties are extensive if employment taxes are not remitted to the government. Even if the failure to remit the tax is a result of an unintentional misclassification, an employer is liable for:
- Unpaid federal and state income taxes, social security and Medicare tax (FICA), federal and state unemployment taxes (FUTA and SUTA), and related penalties
- Missed employee benefits
- Penalties related to workers compensation
- Penalties related to disability insurance
- Failure to pay minimum wage, overtime, meal and rest period, which may result in crippling fines even for a company with a small number of low wage employees
- Criminal liability (in certain cases)
Whether done knowingly or unknowingly, the misclassification of employees as independent contractors subjects a company and its owners to hefty penalties and possible criminal prosecution. In addition to hefty fines for each of the items noted above, under California Labor Code 226.8, the willful misclassification of employees as independent contractors carries a fine of up to $25,000 per incident. Moreover, if a licensed contractor violates that statute, the California State Licensing Board will initiate disciplinary procedures that could result in a loss of licensure.
Under IRC 6672, a company’s responsible persons (e.g., CEO, CFO) can be held personally liable for the failure to collect and pay over tax, even if they had no knowledge of the malfeasance. Keep in mind that the use of a third party payroll service does not absolve a company from its liability for failure to remit taxes to the government.
Note: Written independent contractor agreements and job descriptions – although taken into consideration – are not determinative of worker status. Worker classifications are highly fact-specific.
Safe Harbor Rules & Preventative Measures
The IRS and the Department of Labor are aggressively pursuing employer misclassifications, and states are passing an increased number of laws to protect employees. Employers must be vigilant in ensuring that they are not running afoul of the law and that they take advantage of protections that are available to them:
- Employers and workers may file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding for an official IRS determination of a particular worker’s status (Note: The process takes at least six months)
- The Section 530 Safe Harbor Rule is a federal loophole that may be utilized by an employer who “reasonably” misclassifies a worker as an independent contractor. If certain conditions are met, the employer does not have to pay back taxes and the IRS is precluded from correcting the misclassification in future years.
- The Voluntary Classification Settlement Program (VCSP) provides partial relief from retroactive federal employment taxes.
- If an employment tax audit has already been initiated, the Classification Settlement Program (CSP) may reduce an employer’s tax burden and penalties, and should ensure that all Section 530 Safe Harbor Rules are applied.
Employers must ensure that they and the managers at their company are familiar with employee classification rules, that all tax forms are properly filed and on time, that company policies and procedures relating to employees and independent contractors are frequently reviewed, and that steps are taken to ensure that all employee’s job descriptions accurately reflect their duties. In addition, consulting with an attorney before a DOL audit can save a tremendous amount of time and money in the long run.
Finding a resolution that works for your business
The employment tax attorneys at Moskowitz LLP have represented hundreds of clients in worker classification matters. We will help you find a resolution that works for your businesses and protects you from the consequences of worker misclassification. Contact our office today for a consultation.