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Most workers are employees

July 18, 2015

The issue of worker misclassification – where businesses classify workers as independent contractors and local, state and federal authorities call them employees –  is a long-standing problem area for small businesses. Federal and state auditors (not just tax but worker’s compensation as well) have been engaged in an aggressive “crackdown” on misclassified workers. This week the U.S. Department of Labor issued Administrator’s Interpretation No. 2015-1. In the infamous words of Vice President Joe Biden to Obama: “This is a Big F* ing deal”.

My initial assessment of the new guidance, an opinion apparently supported by National Law Review and Wall Street Journal, is that an accountant would not be in a position to defend the position that workers are subcontractors in most of the popular uses in small businesses today. In simplest terms “most workers are employees“. My older articles like “Who is your employee?” will likely need to be updated with the new guidance.

However there is more to consider first:

1) There was already plenty of confusion and misinformation on this topic already before DOL guidance. There is legitimate reason for confusion.

2) Different legal authorities have different legal standards of “employee vs independent contractor”. Some states still use legal standards that have already been abandoned by federal authorities.

3) The tax risks associated with audits in this area were already the #1 tax risk for small businesses (see my article “Top 10 tax risks for small businesses“).

4) The new guidance by DOL does not change existing law. Specifically, it does not change IRS audit procedures.

5) The IRS does not automatically adopt all standards set by the Department of Labor.

6) Industry groups are infuriated by this new guidance and are calling for legislative repeal.

Yet even with all of these qualifiers, it seem silly to think that the defensive position of many small businesses that use long term independent contractors is not weakened by this DOL guidance.

My point is simply this: the guidance may be wrong and Congress may or may not eventually act to address the issue but in the meanwhile do not count on your accountant or attorney to keep you safe from additional tax assessments if you use independent contractors in a manner when an auditor thinks that you should have treated them as employees.

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