Nearly 200 attendees participated in a series of four breakfast briefings from July 13 to July 22 on Independent Contractor Compliance, co-sponsored by the law firm of Pepper Hamilton LLP and the accounting firm of Marcum LLP in four locations: Philadelphia, New York City, Princeton, and Berwyn PA.
The attendees heard from Pepper’s three co-chairs of the firm’s Independent Contractor Compliance practice, Richard J. Reibstein, Lisa B. Petkun, and Andrew J. Rudolph. The presentation began with a detailed history of independent contractor misclassification, including the increased enforcement activities at the state and federal level as well as recent legislative developments including the growing number of state laws addressing ICs as well as the latest developments on the game-changing Employee Misclassification Prevention Act (EMPA) bill currently being considered by Congress.
The attendees next heard from Lisa Petkun on the tax considerations of IC misclassification. Lisa, a partner in Pepper’s Tax Department, began with the timely anecdote of how she cannot seem to escape the IC issue these days, even on weekends, such as when a close acquaintance of hers, who serves as an IC consultant, lamented that her principal client had recently said that it would no longer pay for the consultant’s professional registration fees because of “some tax issue” that the company’s lawyers had mentioned. Lisa then reviewed the nuances of the IRS test for determining IC status, the IRS penalties for misclassification, as well as ways to minimize those costs under current IRS procedures. Lisa also discussed the “safe harbor” provisions of Section 530 of the Revenue Act of 1978 and the bill in Congress, called the Taxpayer Responsibility, Accountability, and Consistency (TRAC) Act, which if passed would basically end this safe harbor tax provision used effectively by some companies over the past three decades to withstand potential employment tax liability.
Andy Rudolph, a partner in Pepper’s Employee Benefits and Executive Compensation Department and its founding chair, began by informing the attendees how the actions of the tax-protesting suicide bomber, who killed himself when he crashed his plane into the IRS’s offices in Austin, Texas in February 2010, related directly to issue of the issue of IC misclassification. Andy noted that the tax protester stated in his suicide note how he had been financially ruined by the 1986 federal tax law carving out technical service workers from using the “safe harbor” provisions of Section 530. Andy outlined the consequences that companies can face when their employee benefit plans do not take into account “leased” employees in their non-discrimination testing required for some qualified plans, and then traced the planning steps companies can take in advance with most of their employee plans to carve out ICs who are re-characterized by the IRS and the courts as common law employees.
Richard Reibstein, a partner in Pepper’s Labor and Employment Law Department, noted the various tests used by governmental agencies and courts when determining a worker’s IC status under a myriad of state and federal labor, tax, and benefit laws, including the factors used to determine IC status for those workers in the “gray area” between ICs and common law employees. Rich stated that IC compliance was “readily attainable,” identifying three alternative ways that a company could enhance compliance with federal and state IC laws: restructuring, reclassification, or employee leasing/staffing options. Rich then explained to the attendees how they could undertake a 6-step IC DiagnosticsTM program, using Pepper’s “48 Factors-Plus”and its IC Compliance ScaleTM to choose the best solution from among the three alternatives.
The next scheduled seminar on IC compliance is September 23, 2010. Please see the “Upcoming Events” page on this website.
Following these presentations, the authors are returning to their regular blogging, and will cover in the next week the past month’s developments in the area of IC compliance and employee misclassification.