The Department of Labor and the Internal Revenue Service updated a Memorandum of Understanding (MOU) for working together to battle employment misclassifications. The agreement follows the pattern of other federal agencies working together to target independent contractor status.
“We are determined to identify and resolve labor violations by employers who benefit by misclassifying employees as independent contractors and deprive them of the protections of the labor standards laws we enforce,” said Principal Deputy Wage and Hour Administrator Jessica Looman.
DOL’s Wage and Hour Division and the IRS first entered into a similar MOU in 2011. The new one creates a methodology for exchanging investigative leads, complaints and referrals of possible violations. The agencies stressed that the MOU does not allow exchange of federal tax information.
DOL and IRS say they will seek to leverage existing resources and promote employer compliance for properly paying their employees and for paying all applicable employment taxes.
Although concerns over misclassification have been around for decades, the primary target has most often centered around independent contractors, such as truck driver owner-operators.
The focus has expanded in recent years to include free-lancers and gig workers, such as computer programmers. It also has been a long-term issue for labor unions, who are prohibited by law from organizing independent contractors.
The new DOL-IRS agreement states that the “collaboration will enable both agencies to leverage existing resources and promote employer compliance with obligations to properly pay employees and to pay employment taxes. This multi-agency approach presents a united compliance front to employers and their representatives.”
Inquiries will be conducted by a team called the Joint Worker Misclassification Initiative. Consisting of employees from the DOL’s WHD and the IRS Small Business/Self Employed Specialty Employment Tax unit (SB/SE), the team will plan and manage the process where DOL refers cases to the IRS for action.
Employers should keep in mind that this fresh inter-agency agreement carries with it the added sting of punishments and costs associated with running afoul of the IRS, which is something that no business owner wants to experience if it can possibly be avoided.
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“Businesses should take this coordinated focus on worker classification as an opportunity to assess their workers’ classifications and mitigate the risk of tax penalties resulting from misclassification,” advise attorneys Miguel A. Lopez and William Hays Weissman of the Littler Mendelson law firm.
The IRS will target businesses found to lack what the agency deems to be a good-faith basis for the worker misclassification. In the tax agency’s eyes, failure to do so will make them more likely to be on the hook for substantial penalties.
Further criteria used by DOL to decide whether to make a referral to the IRS include whether the business is still operating and if its annual volume of sales exceeds $500,000. The “annual dollar volume of sales” of a business is defined as the gross receipts from all sales of goods or services by the business during a 12-month period.
Relief for employers that had been granted under the IRS safe harbor provisions regarding misclassification may no longer be available, IRS said. Employee status will be determined by a standardized referral form and the DOL/IRS “decision tree” series of question referring to the partnership established by the MOU.
An example of the decision tree of questions is listed in an appendix to the MOU