Are You Misclassifying Workers?

In April 2010, a senator and a group of representatives introduced a bill called the Employee Misclassification Prevention Act in both houses of Congress. Its goal is to require employers to keep records of independent contractors (ICs) they use, and penalize employers that misclassify employees as ICs. Then in September, another group of legislators introduced The Fair Playing Field Act of 2010, also in both houses. This bill would end the current moratorium on IRS guidance regarding worker classification, and increase tax penalties for misclassifying workers.

Both bills were referred to committee, and lacking bipartisan support they aren’t likely to be reintroduced in the current Congress. But this doesn’t mean that the battle is over. The broad goal of this legislation is also being pursued through regulation, as the U.S. Department of Labor (DOL) has placed a high priority on reducing worker misclassification; and it has identified the construction industry as one of the largest offenders. Although large commercial, industrial and home building contractors will obviously be first in the DOL’s sights, all contractors that use ICs will be subject to this enhanced focus – and the motivation is strong. The General Accountability Office is said to have estimated that in one year, the government lost $4.7 billion in federal income and employment tax revenue through improper classification of workers.

To address this, the DOL plans to “redouble its efforts to combat worker misclassification” by funding state grants to improve data-sharing between states and the IRS (and other federal and state agencies - click here). According to this budget report, the DOL grants will also pay for targeted audit strategies, and a cross-state agency task force to “target egregious employer schemes to avoid taxation through misclassification.”

In its 2011 budget, the DOL calls for a “joint Labor-Treasury initiative” to coordinate federal and state efforts, with 100 new hires focused on misclassification and litigation. To expand on that, the 2012 budget would allow for a high performance award program for states that are most successful at prosecuting employers. The bonuses paid will be used to upgrade states’ programs for detection and enforcement.

The DOL’s We Can Help program encourages workers to notify the department if they think they’ve been improperly treated by an employer. To deal with the increase in investigations produced by this campaign, the DOL’s Bridge to Justice program refers claimants to private trial lawyers through the American Bar Association – which has spiked misclassification litigation.

And last, but not least, there’s a proposed rule called the Right to Know Under the Fair Labor Standards Act which will require employers to perform an analysis of all their ICs and notify them of their reasons for classifying them as such.

So if you use ICs in your business, don’t assume that the mere existence of a written contract will be sufficient to immunize you from the efforts of the DOL or its partners. Since neither the DOL nor IRS have a “bright line” test, you should familiarize yourself with the similar but different factors each department uses on a case-by-case basis to determine IC status, and make sure your business practices are compliant.

(My July 2010 web column on this topic can be found here)

How to Make Your Own Silver Lining

Weather-related metaphors are good for capturing the mood of many life experiences, with “gray, cloudy skies” being appropriate for this economy. The natural reaction to cloudy economic prospects is to hunker down and complain about the lack of sun. Then there’s Jim Finlay, owner of Archadeck of Suburban Boston, who recently said “I’m not religious, but thank God for this recession!” Jim is one of those who see silver linings when the skies get cloudy.

Finlay started his remodeling business in 1993, when the country was just coming out of recession; and he recalls hearing some wisdom about how recessions force new business owners to develop frugal practices and watch expenses like a hawk. At the time he was skeptical, but now he embraces the concept. “Slower sales have given me the time and the motivation to examine my business closely,” states Finlay. “I’ve shifted and sharpened my marketing, adjusted my sales process to focus on prospects who appreciate (and who will pay for) our services… examined overhead and project costs and corrected my pricing software to significant bottom line advantage.”

In one example of his analysis, Finlay talks about job costing. “Jobs that end up with high expenses and low contribution attract attention.” But don’t overlook those that come in at target contribution, he advises. When digging into the details of those projects, he has from time to time discovered some offsetting errors – pricing problems that went in his favor hid pricing mistakes that cost him money. By understanding the errors he can make adjustments, critically important to avoid future pricing mistakes that don’t go his way; especially when business is booming again (because it will someday, inevitably).

In expressing a broader, more philosophical benefit of periodic recessions, Finlay says it gives him a chance to re-learn exactly why he’s in business: “To give our clients the world class service they deserve while giving us the satisfaction of having enriched their lives.”

But there can be very tangible financial benefits when slow times allow the business owner to re-evaluate costs. When his office lease was up for renewal, Finlay sent the landlord a polite letter saying “Vacancy rates are up, rents are down… can we negotiate this?” He suggested the rate from two years prior, and the landlord accepted it. Over a two-year lease, he will save $7,700 in rent.

Creative cost control can be habit-forming. After feeling increasingly annoyed by the price increases and unreliable service of his concrete supplier (which has a near-monopoly in his area), he learned of an ingenious engineering solution from a fellow franchisee. So now, instead of paying the concrete supplier to NOT deliver three times as much concrete as he typically needs for his deck footings, Jim exclusively uses helical footings. Not only do they cost slightly less per footing, but they give him a measurable advantage in productivity. No longer does he risk the collapse of 17 four-foot-deep footing holes after a heavy rain (which actually happened on one job); no longer does he have to wait for the building inspector’s approval, or for the concrete to set up. The helical system also has just the right documentation needed to quickly satisfy inspectors. “And I get to thumb my nose at the concrete company,” Finlay says with a laugh.

But ultimately, the down time affords him a chance to “push the reset button” on his business to help achieve his personal goals: “What I really enjoy is focusing on the client, determining what he needs and wants, then giving him exactly that – to his absolute satisfaction. I’m in the renovation business to make some money, yes, but also to enrich peoples’ lives… which sounds corny, but that’s part of my compensation.”

Silver linings, enriching lives. Sounds like the kind of business that will thrive in good times and bad.