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Misclassification of your workforce, 1099, employee or contingent labor

Posted By: Debbie Milks on January 27, 2016

be different

Did you know that the government is looking for reasons under the Affordable Care Act and tax laws to penalize you for your 1099 contractors?  In 2016, it is very easy for your company to be out of compliance and subject to big fines, so the best strategy is to either hire your 1099 contractors as your own employees or engage a staffing firm to hire them as their employees then contract them to you.  If you choose the latter for some or all of your 1099 contractors, then you have one more big choice to make:  Do you want those professionals to be MINIMALLY in compliance with ACA (with minimum benefits) or do you want those same professionals to have industry-standard benefits comparable to your own employees.  If you want your contract professionals to demonstrate the loyalty that comes with decent compensation and benefits, then staffing through Brookwoods Group may be the best solution for your company.

The government continues to dive deeper and deeper into company practices. One of the announced initiatives in 2016 is the misclassification of a company’s workforce. This has always been a topic in HR, where leased employees or co-employment were names commonly used in the past.

Much of this started about 16 years ago. In 2000 Microsoft had to pay a $97 million settlement to contract workers who worked from 1987 to 2000. Companies all over the United States were aware of their potential risk and they created policies and procedures on how to handle “Co-Employment”.   These procedures varied from company to company. Staffing agencies were engaged to help mitigate risk and companies followed their procedures. VMS (Vendor Management System) tools and onsite programs for managing your “flexible” workforce were established. There were still lawsuits filed and settlements made, but most companies were  still comfortable with the programs they implemented in the early 2000’s.

Fast-forward to 2016. As the government continues its search for new sources of tax revenue, the IRS has announced plans to identify companies who are misclassifying workers and are tightening their guidelines around the definitions of flexible worker classifications.

So what? Not a big deal for me, our company is classifying correctly. The impact isn’t that much, so I don’t have to worry. We only have a few 1099 contractors and our company is confident they are classified correctly.

We’ve heard each of these comments. Many companies even feel that Section 530 of the Revenue Act of 1978 provides them a safe harbor.

Still, it is imperative that you consider the impact if you have someone that is a 1099 contractor and they fall in the “misclassification initiative”.   It goes way beyond that and includes:

  • Wage law violations
  • Tax Penalties
  • I-9/E-verify violations
  • Unemployment insurance shortfalls
  • Worker’s Compensation violations
  • Exclusion from benefit plans
  • Antidiscrimination, FMLA, USERRA, and WARN Act law violations
  • Affordable Care Act excise taxes and fines

Solutions

We do recommend that you do a careful check of all of your 1099 contractors. Make sure they are classified correctly by both state and federal standards. If you have any doubts, we recommend you do one of 2 things. Bring them on to your team as W2 employees or engage a staffing agency to take them on as their W2 employee.

If your original purpose of having 1099 contractors and contingent labor was a flexible workforce, then transfer them to a W2 status with your staffing agency. If you chose to keep them on as a 1099 contractor, here are a few questions to ask to ensure you are classifying them correctly. The July 2015 U.S. Department of Labor Administrative Interpretation No. 2015-1 (A1) lists the six factors of the “Economic Realities” test http://www.dol.gov/whd/workers/misclassification/ai-2015_1.htm

  1. Is the work performed an integral part of the company?
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  3. How does the worker’s relative investment compare to the employer’s investment?
  4. Does work performed require special skill and initiative?
  5. Is the relationship between the worker and the employer permanent or indefinite?
  6. What is the nature and degree of the employer’s control?

If you still are not certain there is a 20 question guideline the IRS created and can be found here:

http://www.twc.state.tx.us/news/efte/appx_e_twc_ic_test.html

Brookwoods Group can provide the best of both worlds to our clients, we can convert your 1099 contractors to W2 employees while letting you keep your flexible workforce. What is in it for the 1099 contractor? They would not have the tax burden; Brookwoods Group has competitive benefits, and a steady predictable payroll vs. invoice/billing. No more administrative issues for the 1099 contractor.   Consider Brookwoods Group as your compliance partner.