Employer Misclassification fraud

[Number Six]

Years ago around the turn of the century I had a sobering experience doing various types of landscape and tree work. I hired a day laborer and was doing a fall cleanup and as I was working in the backyard of a property, he was raking leaves off the curb, well away from the road. A teenage kid comes around the corner, jumping the curb and hitting the worker, a Jamaican immigrant who made impact with his shoulder sending him over a stone wall. It was hit and run, but fortunately there was a witness; so the police was able to find and arrest the driver.

Unfortunately for me, I did not have workman's comp insurance so I ended up getting hauled into state workman's comp. court where my lawyer made the argument that he was not an "employee".

Recently I was associated with an afterschool scholastic teaching group that has been classifying all those who worked for them as "independent contractors". How serious is this in most states or is it something where they permit the company to negotiate on fines as long as they get into compliance moving forward?

[Pottapaug1938]

I've been spending too much time on Quatloos. When I saw the word "fraud" in the title of the thread, my immediate guess that it was about your friend and mine, the (ahahaha) renowned Equity Lawyer, EWE....

[JamesVincent]

I've been spending too much time on Quatloos. When I saw the word "fraud" in the title of the thread, my immediate guess that it was about your friend and mine, the (ahahaha) renowned Equity Lawyer, EWE....

IDK, I'm still trying to figure out what the question is.

[AnOwlCalledSage]

IDK, I'm still trying to figure out what the question is.

I assumed it was a US version of what we call in the UK IR35 (or Off Payroll Working) where an employer tries to dodge tax and other applicable laws by categorising an employee as an independent contractor, when by most definitions they are being engaged in direct employment.

In the UK it has been clamped down on quite aggressively, but I guess in the US it's more laissez-faire.

[Number Six]

IDK, I'm still trying to figure out what the question is.

I assumed it was a US version of what we call in the UK IR35 (or Off Payroll Working) where an employer tries to dodge tax and other applicable laws by categorising an employee as an independent contractor, when by most definitions they are being engaged in direct employment.

In the UK it has been clamped down on quite aggressively, but I guess in the US it's more laissez-faire.

And I've had accountants tell me that most contractors pay their workers in cash to circumvent all the employee costs of running a legal business. White collar trades are much more fair game for government intervention because many of them get their money from taxpayer funded sources if they are doing school work.

[JamesVincent]

I assumed it was a US version of what we call in the UK IR35 (or Off Payroll Working) where an employer tries to dodge tax and other applicable laws by categorising an employee as an independent contractor, when by most definitions they are being engaged in direct employment.

In the UK it has been clamped down on quite aggressively, but I guess in the US it's more laissez-faire.

That was my guess also, was just hard to tell. Every state has definitions of what can be considered a 1099 employee as well as the Federal government. Paying someone outside of those parameters can be big fines and having any back taxes unpaid due. Usually just takes a phone call to find out what the rules are for that state and to report it if it's that big a deal.

[Number Six]

I assumed it was a US version of what we call in the UK IR35 (or Off Payroll Working) where an employer tries to dodge tax and other applicable laws by categorising an employee as an independent contractor, when by most definitions they are being engaged in direct employment.

In the UK it has been clamped down on quite aggressively, but I guess in the US it's more laissez-faire.

That was my guess also, was just hard to tell. Every state has definitions of what can be considered a 1099 employee as well as the Federal government. Paying someone outside of those parameters can be big fines and having any back taxes unpaid due. Usually just takes a phone call to find out what the rules are for that state and to report it if it's that big a deal.

The law is fairly clear, as much as many employers try to circumvent the clear rules governing employment vs. "independent contractor" status. Unless someone is really making their own hours and providing their own tools, they are not an independent contractor. I was talking to a former classmate who runs the local composting operation who sees all the landscape workers come in and it is clear to them with the level of competition in landscaping and property work in general that most are paid in cash without any social security, workman's comp and other costs of running a legal business. Tree businesses are more regulated but still if contractors are involved in active bidding with customers going with the cheaper estimates, then they will often be getting companies that circumvent the laws.

Once you get into the white collar trades such as tutoring companies, the rules of employment are more likely to be enforced. I was involved with such a company and I know the guy who started it who had the company essentially stolen from him. He was running a fully legal business and the guy who runs it now has made a huge name for himself as one of the best in his field, but the workers all invoice him for work they've done with nothing deducted. And some companies will try to get workers sign a form that they are "independent contractors", but that does not pass muster if the state wants to enforce the rules.

[The Observer]

The IRS conducts employer tax audits as a way to confirm that employers are not misclassifying employees. They usually go by a "rule of 20" factors to determine whether a person working for a firm is legitimately an independent contractor. The rules focus on the degree of control is exercised over the contract employee by the firm.

1) Level of instruction. If the company directs when, where, and how work is done, this control indicates an employer-employee relationship.

2) Amount of training. Requesting or requiring workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which a worker performs their duties.

3) Degree of business integration. Workers whose services are central to the business operations or significantly affect business outcomes are likely to be considered employees.

4) Extent of personal services. Companies that insist or demand that a particular person performs the work have asserted a high degree of control, which indicates an employment relationship. In contrast, independent contractors are typically free to assign work to anyone.

5) Control of assistants. If a company hires, supervises, and pays a worker’s assistants, this control suggests an employment relationship. If the worker gets to control the hiring, supervising, and paying of assistants, they could be defined as an independent contractor.

6) Continuity of relationship. A continuous relationship between a company and a worker indicates an employment relationship. However, an independent contractor arrangement can also be an ongoing relationship that spans multiple, sequential projects.

7) Flexibility of schedule. If a company gets to dictate a worker’s days and hours of work, this degree of control suggests an employer-employee relationship.

Demands for full-time work. Workers who work full-time hours suggests a company has control over most of their time, which indicates an employment relationship.

9) Need for on-site services. Requiring someone to work on company premises — particularly if the work could be performed elsewhere — suggest an employer-employee relationship.

10) Sequence of work. If a company requires work to be performed in specific order or sequence, this type of control suggests an employment relationship.

11) Requirements for reports. If a worker has to regularly provide written or oral reports on project status, they could be viewed as an employee.

12) Method of payment. If a worker is paid hourly, weekly, or monthly, this could suggest an employment relationship, unless the payments simply are a convenient way of distributing a lump-sum fee. It is more characteristic to pay contractors upon project completion or commission.

13) Repayment of business or travel expenses. Independent contractors are typically responsible for paying for travel or business expenses, and most contractors set their fees high enough to cover these costs. In contrast, reimbursement of travel and other business expenses by a company suggests an employment relationship.

14) Provision of tools and materials. Workers who use company-provided equipment, tools, and materials to perform their work are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor classification.

15) Investment in facilities. While independent contractors and freelancers usually pay for their own work facilities, most employees rely on their employer to provide work facilities.

16) Realization of profit or loss. If a worker’s earnings are predetermined and have little chance to realize significant profit or loss through their work, they are generally considered to be an employee.

17) Work for multiple companies. Workers who provide services for multiple companies concurrently are likely to qualify as independent contractors.

18) Availability to the public. If a worker regularly makes services available to the general public, they could qualify as an independent contractor.

19) Control over discharge. If a company has the unilateral right to discharge a worker, this suggests an employment relationship. In contrast, a company’s ability to end an independent contractor relationship generally depends on the terms specified in the contract.

20) Right of termination. Most employees can terminate their work for a company unilaterally without liability. Independent contractors cannot quit their work engagements without liability, except as permitted under their contracts.

[Number Six]

Considering those conditions, it's clear to me the company is engaging in "misclassification fraud" however the states have to determine whether they want to pursue a given company. In this case, the company is registered as a 501c3, has workers send them invoices for classes taught with payment on a per class basis and the schedule is determined by another employer. And workers are terminated by another employee.

[Arthur Rubin]

The IRS conducts employer tax audits as a way to confirm that employers are not misclassifying employees. They usually go by a "rule of 20" factors to determine whether a person working for a firm is legitimately an independent contractor. The rules focus on the degree of control is exercised over the contract employee.

I recall a 9-part IRS test. The "degree of business integration" was specifically not a factor. Just because a business outsources what they are known for doesn't make the workers "employees".

[Number Six]

The IRS conducts employer tax audits as a way to confirm that employers are not misclassifying employees. They usually go by a "rule of 20" factors to determine whether a person working for a firm is legitimately an independent contractor. The rules focus on the degree of control is exercised over the contract employee.

I recall a 9-part IRS test. The "degree of business integration" was specifically not a factor. Just because a business outsources what they are known for doesn't make the workers "employees".

I agree; you can have "independent contractors" who carry their own insurance working for the company; however hiring people to fill a slot in their tutoring business, controlling both their schedule and materials used and paying them as independent contractors is a violation.

[Burnaby49]

I agree; you can have "independent contractors" who carry their own insurance working for the company; however hiring people to fill a slot in their tutoring business, controlling both their schedule and materials used and paying them as independent contractors is a violation.

Exactly what happened to my wife. She was hired to teach ESL (English as a Second Language) here in Vancouver by a small outfit. She was treated as an independent contractor until the Canada Revenue Agency checked it out. She was reassessed as an employee and she was subpoenaed by the CRA to testify as to her terms and conditions of work when the issue went to Tax Court.

[Number Six]

From what I've heard, Canada is tougher on these types of things than the laissez-faire US. In the case of the company I was involved with 25 or more years have apparently elapsed with their treating employees as independent contractors. I know the guy who set up the 501c3 organization; they changed the locks on him forcing him to resign. It will be interesting to see how the state handles the case. There seems to be a prevalent unwillingness to turn whistleblower, and certain elements in society have all kinds of nasty tactics to discourage reporting fraud, with discouraging rhetoric to head potential "trouble makers" off at the pass. I've heard it all; "Do you want to be happy or right?" It's too bad there are not more whistleblower protections as well as incentives to perform what is often a thankless task.

[Burnaby49]

Canada is very pro-active in this area. The CRA has a specialized audit section that does nothing but payroll audits to make sure source deductions are handled properly. They're constantly checking out employers like private schools for foreign students, construction firms, and small businesses generally to see if their worker's incomes are being reported correctly.

[Arthur Rubin]

The United States is more confused - I believe most of the "misclassification" cases are run by the states. Workmens Compensation is entirely state, and unemployment and labor law violations are mostly state.

I've never had such a client, but it is possible for a person to be an employee under California tax law but an independent contractor under federal tax law, or the reverse.

[jcolvin2]

The United States is more confused - I believe most of the "misclassification" cases are run by the states. Workmens Compensation is entirely state, and unemployment and labor law violations are mostly state.

As a policy matter, the IRS generally prefers that companies treat service providers as employees, because the issuance of Forms W-2 generally result in a greater probability of overall tax compliance. However, when Forms 1099 are issued and employees correctly report as independent contractors, there is no tax loss. The federal tax laws are very forgiving in this situation. See 26 USC Section 3506 (requiring even those reclassified as employers to pay small percentages of otherwise applicable employment tax and federal income tax withholding).

[Number Six]

I worked for a masonry contractor in the 90s who treated me as an independent contractor, though clearly working for him as an employee. I didn't even think of the liability he was in if reported. The whole idea of proper classification for workers is that they have all the rights and benefits due an employee in the US. However many workers got used to cash payments, under the table and off the books work for years. It isn't a problem until they go to collect social security. Not to mention the fear and burdens running an illegal operation places on people.