Recently the State of Michigan
created the Interagency Task Force on Employee Misclassification.The purpose of this task force is to investigate employers suspected of
misclassifying its workers.
“Misclassification” occurs when an employer treats a worker as an “independent
contractor” when the worker should be classified as an “employee.”The motivation for employers to misclassify its employees as independent
contractors is the fact employers can avoid having to withhold income taxes, and
other typical wage withholdings as well as avoid having to pay unemployment
insurance and workers compensation insurance.To avoid these costs the employer issues the “independent contractor” an
IRS Form 1099-Misc. or, in some cases pays the worker “under the table.”The independent contractor, in turn, is then responsible for paying all
the typical withholding taxes.The
problem is that the worker often intentionally fails to pay these taxes or is
unaware of their obligation to pay these taxes.In either event, the State of
Michigan
looses tax revenue, payments into the unemployment insurance fund and other
money typically collected from wages paid to “employees.”In addition, the State of Michigan is concerned with the fact these
workers who are misclassified suffer because they are not protected by
employment laws, do not qualify for unemployment insurance benefits, and in some
cases are not covered by the workers compensation program if they are injured on
the job.
The risk to the employer if it misclassifies it workers is great.Not only does the employer face being held responsible for payment of the
taxes it should have withheld from the “employee’s” wages, it will likely be
responsible for paying the “employee’s” portion of these taxes as well.However, the amount of taxes the employer is required to pay often pales
in comparison to the penalty, interest and other remedies assessed by the State
of Michigan and/or the Internal Revenue Service (“IRS”).The problem gets even worse because the owners of the business, or at
least the person responsible for making sure taxes are withheld from employees’
wages, may be held personally liable to pay these taxes if the corporation
cannot.In addition to having to pay
taxes, penalty and interest, an employer who misclassifies a worker, and
therefore does not obtain workers compensation insurance, may loose the
protection provided by Workers Disability Compensation Act.That is, an employer, unless grossly negligent, cannot typically be sued
by an employee who is injured on the job if the employer has workers
compensation insurance coverage. Without this coverage, an employer could face a
lawsuit resulting in a judgment against it in the 100s of thousands of dollars
as a result of injuries to a person determined to be an employee.
My experience representing clients in audits involving misclassification have,
up to this point, been initiated by the IRS.Although there are a number of ways an IRS audit is prompted, a common
scenario involves the IRS trying to match up the social security number on a
1099-Misc with an IRS Form 1040.
When no corresponding 1040 is found, the worker receiving the 1099-Misc is
audited.If the IRS determines the
worker is not an “independent contractor,” the IRS then audits the employer and
reviews all of the 1099-Misc. issued by that employer.To learn more about how the IRS defines “employees” go to
Independent Contractor versus Employee.
Currently the State of Michigan’s task force is
holding public hearings throughout the state of Michigan and has established a hotline to
take calls regarding businesses suspected misclassifying its workers.Persons expected to use the hotline include not only workers who are
misclassified (because they are audited, fail to qualify for unemployment
insurance, are injured at work, etc.) but also other businesses who suffer a
competitive disadvantage when competing for contracts against businesses that do
not have to take into account the cost of compliance when making its bid.For this reason I suspect businesses involved in the construction
industry will be a common target of the task force.To learn more about how the State of
Michigan
defines “employees” go to
economic reality test.
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