DOL

What’s Your Classification?

Another update from the Jungle…..

At this time of year, as we all think about income taxes and payroll withholding, the perennial issue arises. When is a worker an employee (IRS Form W-2) and when is a worker an independent contractor (IRS Form 1099)?

For decades the answer was straightforward: look at “control”. When a company controls what, when, where and how a worker performs assigned tasks, the worker is an employee. By contrast, independent contractors are given a task and a deadline, and they control how, where, and when they complete the task.

Then life got complicated. In 2015 the Dept. of Labor (DOL) proposed raising the salary level of the overtime rule to $913 per week. Employees with weekly wages below that amount would be entitled to overtime pay if they worked more than 40 hours in a work week. It meant that more employees would be eligible for overtime pay.

At the same time, the DOL adopted the “economic reality” test. If the economic reality was that a worker was financially dependent on the company, then the worker was a W-2 employee. The practical effect of the test was to eliminate the classification of “independent contractor”.

To understand why the DOL took these actions, it helps to understand the philosophical approach of regulatory authorities. Regulatory authorities, including the IRS and DOL, recognize that someone will always find a way to game the system. (Remember the tax shelters that allowed some people to claim they had no taxable income?) So the regulators try to deter gaming by creating tediously detailed regulations that everyone complains are strangling businesses and the economy. (Of course, we eventually learn how to game new rules and complain when they change again.)

In 2015, the DOL wanted to deter perceived abuse of the “exempt” status in the overtime rule, and it wanted to ensure that more individuals would be covered by an employer’s group health plan as contemplated by the Affordable Care Act. To meet these objectives, the DOL proposed raising the salary limit and adopted the “economic reality” test.

The economic reality test was withdrawn, and we’re back where we started with the “control” test. The proposed overtime rule was also withdrawn, and the DOL is considering raising the salary limit but by a lesser amount.

However, it’s still critical to properly classify workers because the consequences of getting it wrong can be financially catastrophic. DOL civil penalties start at over $1,000 per employee per violation. The IRS can assess civil penalties and require a company to restate years of tax filings. Misclassified workers can sue for lost wages and benefits. It’s a triple whammy that few companies could financially survive.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

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No One Tells Me What to Do!

Another update from the Jungle….

Angie’s tearing her hair out trying to help the company owner, Tom. She’s the HR manager and some days it feels like a pretty thankless task.  Tom runs several businesses, including a janitorial service and a moving company.

Tom’s a good guy most of the time and truly wants to help his employees.  He loans money to employees who need a little help between payroll checks. He kept one employee on the health plan for six months while he recuperated from a cancer scare.  

2He hires people who have interesting back stories. His moving company crews include former gang members who are expert at moving other people’s property quickly and efficiently.  Steve, an employee of the janitorial company thinks Jim Beam is a sports beverage.  Tom periodically sends Steve to rehab to 1dry out and ensures that Steve is closely supervised while on the job.

But Angie knows there’s a dark side to Tom. If Tom decides you’ve screwed up, you’re out; never mind the progressive discipline policy.  Angie’s explained countless times that knee jerk reactions can lead to trouble. But Tom says no one is going to tell him how to run his businesses.

This morning, a man shows up in the lobby. He’s Mr. Beatty, an auditor from the Department of Labor’s Wage and Hour Division. He asks for the time and attendance records, job descriptions, and payroll records to verify that everyone is paid the appropriate hourly rate.

3Tom starts rumbling like an over-pressurized steam engine as he glares at Mr. Beatty.  Angie tries to head off disaster by inviting Mr. Beatty to wait in the conference room while she gathers the requested information. She offers coffee to Mr. Beatty but Tom nixes the offer.  Tom takes a deep breath, preparatory to blasting Mr. Beatty out of the universe.

What options are available to Angie?

  1. She can tell the Department of Labor auditor to look away while she kicks Tom in the shins for antagonizing the man who can shut down the company.
  2. She can flirt with the DOL guy in hopes of distracting him.
  3. She can excuse herself from the meeting and go call a recruiting company to begin shopping her resume to a new employer.     

The above scenario is a composite of several actual incidents. The DOL is increasing the number of compliance audits of employers.  HR representatives do their best to keep their employers “legal” but they can’t save employers who think the rules don’t apply to them.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

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Bored to Tears

Trng-2Celia is the HR manager for her company and she handles the internal training when the staff needs to be updated about new employment laws or regulations. She’s been very busy lately preparing to explain the proposed regulations by the U.S. Department of Labor (DOL) on new overtime rules and the DOL’s new “economic reality” test for independent contractors.

Celia’s fascinated by the process of how these new rules are formulated. She wants to understand why the DOL perceives employment problems that need to be fixed. She thinks understanding this background will help her explain the new rules to her fellow employees. Celia creates a PowerPoint presentation that summarizes what she’s learned.

The big day arrives and her co-workers reluctantly gather in the training room. Celia begins her presentation with PowerPoint slides about the Fair Labor Standards Act which is the basis for the new guidance and rules. Then she talks about DOL’s reasons for changing the rules.

Trng-3After ten minutes, an employee asks how the new rules will affect his job. Celia tells him “we’ll get to that in a minute” and clicks through to the next slide. The third time she repeats that phrase, employees begin shifting in their chairs. Some employees surreptitiously check their devices for emails or the latest Candy Crush game.

At the half hour mark, Celia notices that the crowd has thinned. The smart employees grabbed seats near the back of the room so that they could escape. The sycophantic employees and those angling for promotions are hopelessly trapped near the front of the room and forced to continue listening to her presentation.

Celia limps through the rest of her presentation and asks if there are questions. People glare at each other to ensure no one is stupid enough to prolong the suffering by asking questions. Celia ends the training session and one person is trampled in the dash for the exits.

What could Celia do at her next training session to keep people engaged?

  1. She could use flashier PowerPoint slides to keep everyone’s attention.
  2. She could create handouts with key points for discussion and stop using PP slides.
  3. She could revise her presentation to explain how the new rules will specifically affect her co-workers’ jobs.

The above scenario is an only-slightly fictionalized account of dozens of in-house training sessions that I’ve experienced over the years.  No co-workers were ever trampled so there was nothing to break the monotony.  To avoid Celia’s fate at your company’s next training session, consider using the third option by making the information specific and relevant to the employees.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

 

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I’m Independent Until I’m Not

Josh runs a localDriver1 courier service. He decides which jobs to accept and negotiates delivery fees with customers. When a customer calls, Josh looks at the roster of drivers and goes down the list until he finds a driver to handle the job.

His couriers are part-timers and include college students, stay at home moms, and a few Uber drivers. He treats everyone as an independent contractor because they use their own vehicles and set their own hours. All Josh requires is a clean driving record and proof of insurance.

Driver3Yesterday, Ron, a college student driver, was involved in a fender bender while making a delivery.  Ron is desperate to avoid telling his parents about the car. His parents bought the car for him as a reward for dropping his beer and pizza plan for college studies and getting serious about graduating.

Ron asks Josh to help pay for the repairs but Josh declines. He points out that Ron is an independent contractor, not an employee. Josh adds that it’s not his fault Ron was talking on his cell phone while driving and not paying attention to the traffic signals.

So Ron calls his mom to give her a hint that the car insurance premium may, possibly, kind of, increase due to unforeseen circumstances.  Like any experienced mother, Ron’s mom gets the real story within minutes. After she finishes explaining that idiots who can’t multitask shouldn’t try to drive and talk at the same time, she asks for more details about Josh’s courier business.

Driver2Ron’s mom works in HR for a major corporation and she’s just read about the U.S. Department of Labor’s new “economic realities” test. She thinks that Ron is actually an employee and not an independent contractor.

What should Ron’s mom do next?

  1. She can use her HR experience to compare Ron’s description of how the courier business is run to the DOL test and assess whether he’s an employee.
  2. She can ask one of the corporate attorneys at her company to give her an off-the-record assessment of the DOL test.
  3. She can contact Josh directly to argue that he should pay for the auto repairs because she believes her son is actually an employee of Josh’s business.

DOL released guidance on their new “economic realities” test about a year ago. This new test looks at whether a worker is economically dependent on the “employer”.  If yes, then the worker is an employee under the Fair Labor Standards Act (FLSA). Expect to hear much more about this test.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

Join the HR Compliance Jungle today. Click here!

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She’s Not My Employee

Another update from the Jungle….
image008Rob has a small consulting business that does project-based work. That means Rob needs a flexible work force that can easily gear up when there are lots of clients, but can also gear down when projects are few.

Rob relies on a group of individuals that he classifies as independent contractors. For each project, Rob explains what the client wants, the deadlines that must be met, and the scope of work. The worker can accept or reject any project. Rob’s been happy with his flexible work force.

At a recent networking event, Rob heard that the U.S. Department of Labor (DOL) has decided to ditch its old “control” test for deciding if a worker is an independent contractor (1099) or an employee (W-2). Instead the DOL will use an “economic reality” test. Rob does some quick research at www.dol.gov/whd and finds the document outlining this new test. What he reads makes him reach for a bottle of Gentleman Jack.

After a couple of stiff drinks, Rob thinks he understands the main points of this new test. The
image010economic reality test says that a worker who is economically dependent on an employer is an employee and not an independent contractor. Rob doesn’t know if his workers are economically dependent on him. He uses them part-time and always believed that they did work for other consulting businesses.

Rob sees that the new test has several factors. The factor that most worries Rob is the one that says if the work performed is an integral part of the employer’s business, then the worker is a W-2 and not a 1099 worker. Rob knows that his consulting business depends on completing projects for his clients which requires the use of skills that his independent contractors have.

After another shot of Gentleman Jack, Rob does some worst case scenario calculations of what will happen if his workers must be converted to W-2’s. He realizes immediately that it wouldn’t be financially possible to convert all of them to employees.

What are Rob’s options?

  1. He can choose a couple of the independent contractors that have the broadest range of skills and offer to convert them to W-2’s who work full-time for him. All the other workers would no longer be eligible to work on his company’s projects.
  2. He can talk to his CPA about cash flow and tax strategies for dealing with the new economic reality test.
  3. He can continue business as usual, including drinking more Gentleman Jack, while he waits to see what DOL will do.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

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