It’s not uncommon for employers to consider someone a consultant, freelancer or outside contractor when that person would be deemed an employee by IRS or Department of Labor standards. Honest mistakes do occur of course; but some employers may consider the illegal but real financial incentives to deliberately misclassify workers, i.e. to avoid payroll taxes, unemployment and workers compensation premiums, overtime pay and benefits costs. However, if your organization is audited and found to be guilty of misclassification, the back pay, back taxes and fines and penalties, in addition to all the resources expended during an audit, can be enormous. Combined with the possibility of opening the organization up to additional future scrutiny, it’s just not worth it.
Newly increased focus by the IRS, in partnership with a number of state authorities, is making misclassification a riskier prospect than in years past. So how can you be sure your organization is classifying workers correctly? IRS guidance says to look at the worker/organization relationship and consider the amount of control the organization exerts vs. the amount of independence the worker has. The following common law guidance comes from the IRS web site and provides links to factors you should consider under each category:
Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? 2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) 3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Keep in mind that there are other considerations as well such as the DOL viewpoint for purposes of the Fair Labor Standards Act (FLSA) and state legal standards for unemployment or workers’ compensation purposes. But the IRS links above are a great place to start to help you feel confident about proper classification.
If you come to realize you are not in compliance, seriously consider taking advantage of the IRS’ new Voluntary Classification Settlement Program (VCSP.) Details on the VCSP are forthcoming in Part 2 of this blog.
The Congressional “super committee” failed to reach a deal last week so we still don’t know whether the employee contribution to social security of 4.2%, initiated in 2011, will hold beyond year end or whether it will revert to 6.2% come January 1st. Year end is always crunch time for payroll and human resources departments so that uncertainty just adds another item to the list you need to keep track of.
You’re probably already in the midst of myriad benefits and payroll changes and will soon be engaged in year end wrap up, preparing for numerous payroll entries in the new year and the testing of and preparation for W-2s. On top of that, the upcoming holiday season may alter payroll, direct deposit and tax payment deadlines. You can’t control everything, of course, but when you anticipate and deal with as much upfront as you can, you’ll have that much less stress throughout the year end process. For example, one of the best things you can do at the beginning of the calendar year is set up payroll fields that have annual dollar limits with pre-set cutoff amounts so you’ll never have to worry about refunding overpayments. Establishing payroll and HR checklists goes a long way to help you stay on task; if you need help starting a checklist, subscribers to HRSentry can access a helpful list by entering “year end” in the search box from the home page.
In that anticipatory vein, let your employees know what to expect as well. The more they understand about their benefits, taxation and other items that affect them, the happier they’ll be and the less you’ll have to deal with complaints and disappointed staff members. Here are a few tips to help your employees:
Remind folks of remaining paid holidays for the rest of this year as well as holidays for the coming year so they and their managers can plan ahead. If you have a “use it or lose it” vacation policy, remind employees how much they have left to help them avoid disappointment.
If your employees receive taxable benefits, let them know upfront that they will be taxed so there are no surprises. Remember that cash and cash equivalents such as gift cards are always taxable. And if you provide benefits such as term life insurance greater than $50,000, adoption benefits or personal use of a company car, make sure you comply with and help your employees understand any tax implications.
If your organization has health flexible spending accounts (FSA) through a Section 125 Plan, remind employees that they must use their funds by December 31 (or a later date if your plan has a grace period) or forfeit them. Also remind them of the date by which they must submit claims. Let your employees know about 2012 IRS limits on HSA contributions and retirement plan contributions so they can make adjustments in their elections. There’s excellent IRS guidance to help you find those 2012 retirement plan limits in one place. For HSA contribution limits, click here.
Are there some human resources topics that you find particularly complex and confusing? Are you new to human resources and struggling with getting started? Are there legal areas you suspect your organization is getting wrong and you’d like some help to get it right?
We’re preparing the HRSentry® monthly webinar schedule for 2012 to give subscribers timely online trainings they can really use. If you can’t attend at a webinar’s scheduled time, we always upload the slides and a recording of the presentation into HRSentry®’s training libraries so you may view them at your convenience. Our aim is to focus on topics that are the most helpful to as many of our subscribers as possible.
Here are some topics being considered for 2012, based on the resources subscribers seem most drawn to and on attendance at our 2011 webinar trainings:
The Basics of Human Resources
The Family and Medical Leave Act (FMLA)
The Fair Labor Standards Act (Overtime Regs)
How to Avoid Unlawful Termination Lawsuits,
The Whys and How-tos of Job Descriptions,
Understanding COBRA Administration
Ask the Pro (HR Legal Questions Answered in Real Time)
Creating An Employee Handbook
Organizing Personnel and Other HR Files—What to keep, how long and where?
Social Media in the Workplace
Sexual Harassment Awareness
What do you think? Let us know your thoughts on these or feel free to suggest other HR topics. We’d love to give you the online training programs that help you the most. Please contact us at: support@hrsentry.com.
As accusations of sexual harassment continue to dog Herman Cain’s run for the Republican Presidential nomination and the media blare new developments daily, it brings to my mind four questions that employers should ask themselves: What does sexual harassment in the workplace consist of? How do we prevent it? What should we do when an allegation of sexual harassment does occur? Why should we care?
Taking the last question first, i.e. why care, there are important legal considerations to having a workplace free of sexual harassment. Sexual harassment in the workplace violates Title VII, a federal law enforced by the Equal Employment Opportunity Commission (EEOC) prohibiting discrimination against protected groups. There have also been laws against sexual harassment enacted by each state. But more than the legalities, it simply makes good business sense to maintain a working environment in which employees feel comfortable and respected to avoid the costs of poor morale, reduced productivity, lawsuits, and damaging public relations issues.
Sexual harassment consists of any unwelcome sexual advance or conduct on the job that creates an intimidating, hostile or offensive working environment. Any conduct of a sexual nature that makes an employee uncomfortable has the potential to be considered sexual harassment. The harasser can be the victim’s supervisor, manager or co-worker or non-employee such as a customer or salesperson.
Although Cain’s accusers are women, and it is common for females to be victims of male harassers, sexual harassment is not gender dependent. The victim can be male and the harasser female and harassment can occur within the same gender as well.
So how do you make sure it doesn’t happen at your workplace?
Adopt a clear sexual harassment policy. Your policy should be in your employee handbook and should be distributed separately to all new employees to emphasize its seriousness and to make sure everyone understands it. If you have an intranet, post it there as well and on any bulletin boards where you normally post employee notices. Your policy should: define sexual harassment, state in no uncertain terms that you will not tolerate sexual harassment, state that any wrongdoers will be disciplined (and that such discipline may include termination), set out a clear procedure for filing sexual harassment complaints, state that you will investigate fully any complaint that you receive and state that retaliation against anyone who complains about sexual harassment will not be tolerated. It’s important that employees have more than one person to report a complaint to; the last thing you want to have is a victim whose only recourse is to complain to their harasser!
Train your staff. Conduct training sessions for employees at least annually. These sessions should teach employees what sexual harassment is, explain that employees have a right to a workplace free of sexual harassment, review your complaint procedure and encourage employees to use it. Let employees know that you take this topic seriously and do not tolerate inappropriate behavior.
Train supervisors and managers. At least annually, conduct training sessions for supervisors and managers that are separate from the employee sessions. The sessions should educate the managers and supervisors about sexual harassment and explain how they should deal with complaints. Be sure they understand that complaints should be dealt with in a timely manner and that any retaliation on their part will not be tolerated.
Monitor your workplace. Know your employees well and be observant. Talk to staff about the work environment and the level of respect. Ask for input and encourage open communication. Take a closer look at any hint of a problem. Talk to managers and supervisors about always setting a good example.
Take all complaints seriously. If someone complains about sexual harassment, treat the person with empathy and respect. Act immediately to investigate the complaint. If the complaint turns out to be valid, your response should be swift and effective. Sometimes a person complains to HR but asks that it not go further. Explain to the person that you must investigate fully and that, while you cannot guarantee anonymity, you will protect their identity to the extent that you are able.
Creating a respectful work environment goes a long way toward preventing problems. But people are complex creatures and, despite all your steps and hard work at risk reduction, you may still have to contend with an allegation of sexual harassment. Strong policies and prevention measures, respectful and non-retaliatory treatment of the accuser, a swift and thorough investigation and an appropriate response will work in your favor.
Some rare good news from the IRS was that the requirement to report the value of health insurance on W-2s, as required by the Affordable Health Care Act, was postponed from 2011 until 2012. The reprieve was granted to allow more time for employers to put necessary payroll systems and procedures in place. Many, if not most, employers won’t have to worry about it until running their 2012 W-2s in time for distribution by January 31, 2013. There is a slight catch, however, in that employees who terminate during the year technically have the right to request their W-2 form within 30 days of termination. So employers may be on the hook to supply the information much sooner. As you plan for the coming calendar year, don’t procrastinate setting up a system to capture the information as early as possible in 2012 just in case.
Reporting premiums on 2011 W-2s remains optional. It’s a good tool to help educate employees on just how much the employer is paying in health insurance premiums on their behalf. Ordinarily, such “sticker shock” doesn’t hit unless and until an employee terminates without other health coverage options and needs to consider taking on the full cost of the employer’s health coverage through COBRA. At that point they are usually quite shocked and dismayed to learn the full cost of premiums.
The health insurance value reported on W-2s is excludable from income and thus not taxable and, purportedly, that won’t change. But the reporting will help the IRS monitor compliance with coverage mandates for large employers slated for 2014. And the information will help employers know whether their health plan offerings are headed toward being considered “Cadillac plans” which are scheduled to incur excise taxes in 2018.
