Workers And Federal Government Are Being Cheated By Misclassification Of Workers

[Omaha Steve]

Source: NH Labor News

Washington — A new study released today by the Economic Policy Institute (EPI), (IN)dependent Contractor Misclassification, shows that between 10 and 20 percent of employers misclassify at least one worker as an independent contractor rather than as an employee. More than 10 million American workers are now wrongly misclassified and ineligible for unemployment insurance, minimum wage, overtime pay and workman’s compensation.

This fraudulent and widespread practice not only puts workers at risk – it also is costing states and the federal government billions in tax revenue. As a result of misclassification, states do not receive payroll taxes they would be owed otherwise. At the federal level, Social Security taxes go unpaid, and, as hard as it is to believe, employers caught committing fraud by intentionally misclassifying workers generally don’t even receive a slap on the wrist by the IRS.

A tax loophole — designed to be temporary, but now on the books for 37 years — actually protects employers who misclassify workers. The so-called “Safe Harbor Rule” (or more technically, Section 530 of the Revenue Act of 1978) allows companies to misclassify workers as independent contractors for tax purposes even if it has been demonstrated that they really are employees. The same rule prohibits the IRS from seeking back taxes or in any way ordering a change of status for the worker.

President Obama has proposed closing the loophole in his 2012, 2013, 2014 and 2015 budget proposals. The U.S. Treasury estimates that eliminating Safe Harbor would generate $9 billion in tax revenue over 10 years.

FULL story at link. NH Labor News is run by DUer Matt Murray


(image by Wiki Commons)

Read more: http://nhlabornews.com/2015/06/workers-and-federal-government-are-being-cheated-by-misclassification-of-workers/

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New Study by EPI Shows Some Employers are Ripping Off Workers’ Wages and Cheating States Out of Tax Revenue, Companies that Play by the Rules Disadvantaged

More than 10 Million Workers Misclassified; $9 Billion in Federal Tax Revenues at Stake

[kath]

1. An, um,interesting thing about this is that the Social Security Administration itself does this with

Some of its workers.
And I suspect the IRS does it too(but no real proof).
State government agencies also do it.

[Recursion]

2. There's a growing cottage industry of lawyers filing class actions over this

It's not the ideal way to handle the problem, but at least it's something. They have a pretty good track record, because DoL's rules are pretty clear and strict. If you set hours, provide equipment, and require specific behavior rather than just results, you have an employee, not a contractor.

[kath]

3. And if a worker has to be trained in how to do the job, then that person is an employee.

[Recursion]

4. Yep. I expect Uber to lose on this

I think that case hits the docket soon.

[haele]

5. Another one of those loopholes for a few special industries as a favor-

That became a monster once more and more industries found out about it.
Once set in place because in only affected a couple tens of thousands of workers - hey, the Unions were strong enough to ensure that it would'nt be a big revenue hit, right?
Well, guess what? The reason for business is no longer to provide a good or service that is publically needed, it's to make a profit. Labor isn't "needed" to make a profit anymore.

Time for that loophole to go.

Haele

[kath]

6. Kick for visibility

This has been going on for far too long and needs to stop.

[TexasBushwhacker]

7. If a worker feels they are an employee

and not a contractor, they can file a form SS8 with the IRS. If the IRS agrees with the worker, the employer will have to pay the employers portion of Social Security and Medicare. If the IRS finds that the employer was classifying employees as contractors fraudently, they can be charged penalties as well. Microsoft got hit with a $100 Million judgement several years ago over their use of "permatemps".

[lonestarnot]

9. I think you typoed.

[TexasBushwhacker]

10. Please specify n/t

[lonestarnot]

12. Judgment doesn't have an E after G. :)

[TexasBushwhacker]

13. Ah!

[lonestarnot]

8. IRS takes forever to reclassify when it is challenged. Taxes must be paid by the employee and then

refunded after the damage is done. Waiting for the refund also takes forever. Then IRS doesn't know what its own workers did in the reclassification. Fucking nightmare.

[davekriss]

11. My understanding is that the safe harbor clause was eliminated by Section 1706 of the ERTA of 1986

Prior to the 1986, highly technical and professional jobs were "safe harbored", which is to say a firm choosing to hire someone on a 1099 basis was free from tax liability, and the seller of the services (the independent contractor) was able to take the kinds of tax benefits that accrue to businesses (classic, subchapter S, etc.).

These were boom years for IT and engineering professionals, many who squeezed out some of the market share captured by the higher priced resource augmentation firms. The latter, of course, lobbied hard for Section 1706, which (again) eliminated the protections of the Safe Harbor clause. The result was a big chill in the market for independent contractors as many large firms, due to risk and confusion, insisted their flex staff be W2 employees of the larger contracting firms.

Many of these large firms got their start as a result of the Safe Harbor clause. Then, in 1986, they lobbied for and succeeded in pulling up the ladder keeping low-overhead competition from carving out their own niches in the market. I remember when section 1706 was announced (a NY Times article). I was on the open office floor of a large manufacturer: cries and moans groaned out of the mouths of the many contractors who saw it (rightly so back then) as an end to their cherished independent status.

All contractors became subject to the scrutiny of the highly-subjective 20 question IRS checklist for determining independent status. Most failed. Thus the big chill of 1986 on independent contracting...

Things must have changed since then? The Safe Harbor clause was reinstituted?