Law Office of Lori A. Goldstein
Client Bulletin October 2011
Surprise Relief for Employers and Good News for Workers: Voluntary Settlement Opportunity to Reclassify Independent Contractors to Employees
The Internal Revenue Service (IRS) has established a new Voluntary Classification Settlement Program (“VCSP”), allowing employers to reclassify workers from independent contractors or non-employees to employees at significantly reduced tax costs, legal liability and exposure. Whether a worker is an employee or an independent contractor depends on several factors, including the extent of control a company has over the individual. VCSP follows a recent agreement between the Department of Labor (“DOL”), IRS and 11 states, including Illinois, to share information and cooperate to enforce worker classification laws. This program can benefit employers who are currently at risk of audit and penalties for not treating true employees as employees. Similarly, workers will benefit from the new employee rights provided.
Based on the need for additional tax and unemployment revenue in the current economic climate, the IRS and other governmental agencies have increasingly focused on whether organizations are properly classifying workers. Organizations that misclassify workers may be subjecting themselves to IRS scrutiny and liability for unpaid Social Security and Medicare tax, income tax withholding, penalties and interest. In addition, misclassification can lead to liability to workers and the government, under state tax laws, workers’ compensation laws, unemployment compensation laws, federal or state wage laws (e.g. overtime, minimum wage, meal breaks, vacation pay on termination), ERISA, discrimination laws, or many other employment laws.
Who Is Eligible for VCSP?
The program is available to businesses, including tax-exempt organizations and government entities, who want to voluntarily and prospectively change the classification of certain workers – currently treated as independent contractors or non-employees – to employees. To be eligible, an organization must satisfy the following requirements:
Consistently treated the workers as non-employees;
Filed all required Forms 1099 for the workers for the previous three years;
Is not subject to a current IRS audit or any worker classification audit by DOL or a state government agency; and
Has complied with the results of any prior IRS or DOL audit concerning the classification of the workers.
VCSP Terms and Conditions
To begin the process, employers must prepare and file IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before the date that the worker reclassification is proposed to take effect. The IRS will contact the employer once it has reviewed the Form 8952 and verified eligibility. The Form can be found at http://www.irs.gov/pub/irs-pdf/f8952.pdf, and the instructions at http://www.irs.gov/pub/irs-pdf/i8952.pdf
The employer must agree to prospectively treat the class of workers as employees for future tax periods. Additionally, with respect to the three calendar years following the reclassification, the company must agree to extend the statute of limitations on assessment of employment taxes from three to six years.
Under the VCSP, the employer: (1) will pay slightly higher than 1 percent of the prior year’s wages attributable to the reclassified employees*; (2) will not be liable for any interest and penalties on that liability; and (3) will not be subject to an employment tax audit with respect to their worker classification of those workers for prior years.
VCSP Benefits – Employers and Employees
Employers obtain the following benefits under the VCSP:
Employers pay the IRS 10% of tax liability in full payment of payroll taxes due (approximately one percent of the reclassified employees’ compensation for the preceding tax year.)
No interest or penalties will be applied.
The IRS will not audit payroll taxes for prior years related to the workers who are voluntarily reclassified as employees.
Reclassified employees will benefit from employee rights, including Social Security and Medicare tax, income tax withholding, workers’ compensation laws, unemployment compensation laws, overtime, minimum wage, meal breaks, ERISA, and other benefits otherwise provided to the company’s employees.
Employer Issues to Weigh in Considering VCSP
– Not All Potential Liability Resolved: Because the program’s goal is employment tax compliance, the settlement is limited to resolving federal employment tax liabilities with the IRS. But, it does not relieve employers of liability to the workers and agencies under state tax laws, workers’ compensation laws, company employee rights, or other employment laws and related audits, fines, penalties and other liabilities.
– No IRS Audit Shelter for Workers Not Reclassified: VCSP is also limited to the specific workers reclassified: employers will not be subject to an IRS audit of those individual workers. However, the IRS may check to determine that all workers in a specific job group/classification have been reclassified. Moreover, VCSP has no effect on the risk of audit for other classifications of workers that were not reclassified, and for issues unrelated to worker classification.
– Employee Rights and Benefits: Reclassified employees will be entitled to the same rights and benefits shared by current employees, including rights under various employment laws that do not apply to nonemployees and independent contractors. Increasing the number of employees can impact employee benefit plans. For example, a company with a defined benefit pension plan or that contributes to a multi-employer plan may face unexpected liability for contributions or benefits for the reclassified workers. ERISA plans may need to be amended to cover reclassified workers prospectively.
– Confidentiality: Whether employers’ voluntary submissions to the IRS will be subject to disclosure is uncertain. Generally, tax return information, personal and financial data is not revealed. But, the agencies have agreed to share information and refer matters to each other. Should such information become public, these settlements could lead to private individual and class action claims of misclassification.
The agreement signed by the agencies means that employers may simultaneously face audits and enforcement on multiple fronts. The IRS is providing employers with an opportunity to seek relief for possible misclassification mistakes. All businesses who classify workers as independent contractors or non-employees should consider both reviewing that classification and determining whether a filing under the VCSP is appropriate.
NLRB Requires Employers to Post Right to Unionize in January
Recently, the National Labor Relations Board (“NLRB”) postponed until January 31, 2012 the effective date of its controversial new rule requiring private employers to post a notice advising employees of their right to form and support a union. Failure to post the notice would constitute an unfair labor practice. Both Congressional opposition and several lawsuits challenge the rule based on the agency’s authority and First Amendment rights. The delay may afford courts an opportunity to decide on the rule’s validity before the effective date. But employers should be prepared as posting could increase union organizing activity. Make sure managers are familiar with and enforce applicable employment laws and company policies and keep the doors of communication open. .
The Law Office of Lori A. Goldstein represents both employers and individuals with workplace issues. For assistance regarding whether a worker is properly classified or other workplace issues, please contact attorney Lori A. Goldstein at (847) 624-6640 or [email protected].
Copyright 2011 Lori A. Goldstein