Kathleen Barrow, Partner Jackson Lewis LLP 1415 Louisiana, Suite 3325 Houston, Texas (713) © 2012 Jackson Lewis LLP

Defining the Issue 1 st Quarter 2010, IRS commences the “Employment Tax National Research Project: Employment tax audit program focusing on worker classification 6000 random audits of companies from New tools developed to aid in identification of worker classification issues

Defining the Issue March 16, 2011, Statement of Hilda L. Solis, Secretary of Labor to the Subcommittee on Labor, US House of Representatives Characterizes employers who misclassify workers as o Avoiders of minimum wage and overtime laws o Evaders of payroll taxes o People who seek to deny workers of the protection of health and retirement benefits, workers’ compensation and unemployment compensation

Federal Statistics Relied Upon by IRS and DOL Up to 30% of employers misclassify workers 3.4 million workers are contractors, when they should be employees Revenue loss to US Treasury is $3.4 billion, annually Income tax Social Security Medicare Unemployment Insurance Trust Fund

What IRS is Doing (other than the 6000 audits) Form SS-8s sent to self-employed individuals who receive Form 1099 Questionnaires to sponsors of employee benefit plans Information sharing with DOL, state unemployment and taxing agencies Form 211- Whistleblower Program o Up to 30% of tax, penalty and interest recovery for individual transactions $200,000 or more and corporate transactions of $2 million or more o Up to 15% of tax, penalty and interest for lesser transactions

What the DOL is Doing 129 FTEs for multi-agency audit and enforcement Wage and Hour hires 107 new investigators for targeted industry investigations $24.7 million to fund state grants to identify worker misclassification issues in state unemployment insurance administration and facilitate information sharing with DOL

More DOL Initiatives OFCCP allocates $3.6 million and 11 FTEs to address misclassification in government contract operation Office of the Solicitor allocates $1.4 million and 7 FTEs to bring multi-state litigation against large employers determined to “abuse” independent contractor status OSHA adds 2 FTEs to train inspectors on worker classification issues

Worker Misclassification Issues Employment tax liability Minimum wage and overtime Unfair labor practices liability Violation of terms of government contracts as to prevailing wage, etc. Employee benefit plan operational failures Tax liability Benefit liability

Federal Tax Exposure Employment tax liability Past federal payroll taxes (3 years back, or more) State payroll taxes Up to 100% penalty—if willful failure Income tax not withheld Trust fund recovery penalty for responsible persons

Section 530 Relief Employer has properly filed all tax and informational returns Employer has consistently not treated workers in job as employees Employer reasonably relied upon Consistent and widespread industry practice Attorney advice Prior judicial or administrative precedents

FLSA Exposure Minimum wage/over time (up to 6 years) Liquidated damages (100% penalty) Application of damage model to all workers in same job, not just individual worker DOL supervision over payment of wages Attorneys’ fees and costs

Employee Benefit Plan Exposure Welfare plans Premium costs Lost benefits Loss of tax benefits for certain employee/participants 401(k) plan 50% of average elective deferral for all years of eligibility Matching contributions Investment earnings (average) Correction with DOL and IRS for plan failures

Classification Tests Common law—23 factor test FLSA- “economic realities” test IRS Behavioral controls Financial controls Type of Relationship

IT ALL REALLY BOILS DOWN TO… THE “JOE THE PLUMBER” TEST!

Questions? Thank you for your kind attention!

Speaker Kathleen R. Barrow, Partner Jackson Lewis LLP The Wedge International Tower 1415 Louisiana, Suite 3325 Houston, Texas (713)