2. 1 THE OXYMORON OF THE 1099 EMPLOYEE Breakout Session D15 Tom Reid, CPCM, Fellow, Director, Navigant Consulting, Inc. Cathy Etheredge, CPCM, CFCM, Fellow, VP – Director of Contracts, UXB International, Inc. TUESDAY, JULY 31, 2012 11:15 AM–12:30 PM

3. 2 Facts: Employees are costly (e.g., recruiting, hiring, training, etc.) Maintaining a “standing army” not a viable option Limitation on Subcontracting Clause requires use of preference holder’s own employees (generally 51% of cost of labor) Size standards sometimes dictate a maximum number of employees Employees

4. 3 When employees are not available… Hire temporary employees (or independent contractors) By definition, NOT an employee Either an “independent contractor” or Employee of a subcontractor Options to Hiring Employees

5. 4 Thus the oxymoron… By definition a worker is EITHER an employee or an independent contractor And legal implications… Tax payment Contract compliance Potential liability THE OXYMORON

6. 5 Primary Benefit to the Employer is Cost: Not entitled to benefit programs Often work at remote locations; not directly supervised Responsible for paying own taxes and benefits Work as assigned using own resources Remuneration agreed upon; deliverable provided There is nothing wrong using a “1099 employee” Using Independent Contractors via a 1099

7. 6 Problems arises… Independent contractors not afforded their independence and are treated nearly identically to employees Compounded… Independent contractors do not file and pay appropriate taxes Enter IRS and DOL… Defending allegations or participating in an audit – Costly! Can you Treat a “1099 Employee” as a Regular Employee?

8. 7 A 2000 study commissioned by DOL - 30% of firms misclassify employees as independent contractors A 2007 GAO Report states… - At least 150,000 workers did not receive the protections and benefits to which they were entitled due to misclassification Why are the DOL and IRS Interested?

9. 8 Recent MOU between IRS and DOL (signed 9/19/11) Pact between the agencies “to share information” and “coordinate law enforcement efforts” In essence a “crack down” on companies that are misclassifying independent contractors as employees 11 states have agreed to cooperate with the IRS and DOL THE 1099 POLICE

10. 9 Contractor receiving a preference award… Must verify that they are still “small” Qualification for the preference could be jeopardized Must comply with limitations on subcontractors Failure to comply can result in … Loss of contract Prosecution for making false claims / statements Suspension / Debarment Risks to the Government Contractor

11. 10 The Supreme Court has determined the following factors are key to segregating employees from independent contractors: 1.skill required 2.source of tools and instrumentalities 3.location where work performed 4.duration of relationship of parties 5.hiring party's right (or lack thereof) to assign additional projects WHAT ARE THE STANDARDS?

12. 11 6.hired party's discretion over when and how long to work 7.method of payment 8.hired party's role in hiring and paying assistants 9.whether the work is part of hiring party's regular business 10.whether the hired party is in business 11.whether "employee benefits" are provided 12.the tax treatment of the hired party Supreme Court factors (continued)

13. 12 IRS uses a 20-factor test… Admits to being a non-exhaustive list For example: -Not just the right to control the end result, but also the right to determine the “manner and means” of accomplishing the result IRS STANDARDS

14. 13 Services Rendered Personally: If the worker can accomplish the job through assistants or delegates, he is probably an independent contractor. If the worker personally is required to do the work, he is probably an employee. Significant Investment: What does the worker have at risk? Does he own the major equipment needed to accomplish the work? If so, he is probably an independent contractor. IRS EXAMPLES

15. 14 Continuing Relationship: If the worker was previously on the payroll and was converted to an “independent” status, or has been with the employer for an extended period essentially doing the same job, the worker is probably an employee. If he only comes when called and that is infrequently, he is probably an independent contractor. Payment by Hour, Week, Month: If the worker is paid based on time increments worked rather than jobs completed, he is probably an employee. MORE IRS EXAMPLES

16. 15 Recently the IRS has used a “three category” test: Behavioral Control - Instruction on how, when, or where to work Financial Control - Significant investment; Unreimbursed expenses; Opportunity for profit or loss Type of Relationship - Written contract; Employee benefits IRS “THREE CATEGORY” TEST

17. 16 Various States provide a specific statutory definition of “independent contractor”: Arizona… “An independent contractor is a person engaged in work for a business, and who while so engaged is independent of that business in the execution of the work and not subject to the rule or control of the business for which the work is done, but is engaged only in the performance of a definite job or piece of work, and is subordinate to that business only in effecting a result in accordance with that business design.” STATE DEFINITIONS

18. 17 But in California and Nevada… “ ‘Independent contractor’ means any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.” And in Massachusetts, New Jersey, New York and Pennsylvania… No state-based legal standard to determine the relationship MORE STATE DEFINITIONS

19. 18 Many Federal Laws recognize “joint employment” … Occupational Safety and Health Administration (OHSA) - Requires employers to report injuries / post statistics Fair Labor Standards Act (FLSA) - Requires payment of overtime OTHER FEDERAL LAWS

20. 19 Employee Retirement and Income Security Act (ERISA) - Controls employee health and welfare benefits Immigration Reform Control Act - Assuring employees are a lawful resident MORE FEDERAL LAWS

21. 20 Civil Rights Act Age Discrimination in Employment Act Americans with Disabilities Act National Labor Relations Act Family and Medical Leave Act Jones Act Federal Worker’s Compensation Defense Base Act Healthcare Insurance Portability and Accountability Act Patient Protection and Affordable Care Act Proper classification of employees can have consequences! AND EVEN MORE FEDERAL LAWS

22. 21 Joint Employees Historically an employee has only one employer Today multiple is common Case in Point – Microsoft (1992 class action lawsuit) - $97M settlement to approximately 10,000 “permatemps” - Practice whereby an employer pays a worker through a temporary employment agency to avoid paying benefits JOINT EMPLOYMENT

23. 22 Additional Ramifications… Loss of contract due to misrepresentation - Investigation by IRS (and State authorities) - Termination costs - Suspension / debarment MISCLASSIFICATION CARRIES EXTREME CONSEQUENCES

24. 23 SBA’s answer to “Does a ‘1099 employee’ count?” “It depends” 13 CFR Parts 121 and 126 NAICS Code SBA’s Size Policy Statement No. 1 Limitations on Subcontracting Clause (FAR 525.219-14) SBA PERSPECTIVE

25. 24 Employees are costly and maintaining a “standing army” puts a small business at an economic disadvantage Employers need an agreement that clarifies the key aspects of the arrangement with the individual Use caution when using the terms: “1099 employee” or “independent consultant” or “non-traditional employee” When in doubt, go to the IRS (Form SS-8) CONCLUSION