The Internal Revenue Service has launched a partial amnesty program for employers who voluntarily reclassify independent contractors as employees for future tax years.
That could be good news for some independent contractors who really are working like employees and should get the rights and benefits that come with it.
Unlike independent contractors, employees are covered by wage and hour and antidiscrimination laws, workers' compensation and unemployment insurance programs. Employees are often entitled to paid vacation, sick leave, health and pension benefits and company stock plans; contractors usually are not. Employees pay only half of Social Security and Medicare tax and their employer pays the other half. Independent contractors have to pay both halves.
The rules for determining whether a worker is an employee or independent contractor have never been clear cut.
If the IRS audits an employer and decides it should have been treating independent contractors as employees, the employer can be liable for all or a portion of the federal income and employment taxes it should have paid or withheld from those workers -- plus interest and penalties on that amount.
Under the amnesty program, if an employer that is not already being audited voluntarily reclassifies its employees, it will pay a fraction of the employment taxes due for the most recent year, no interest or penalties and will not be subject to an IRS employment tax audit for past years.
But it's not a get-out-of-jail-almost-free card.
The employer could still be liable for unpaid state unemployment insurance and workers' compensation premiums. Workers who had been misclassified could sue to recover pay and benefits they might have been entitled to.
Reclassifying workers under the IRS program could even encourage state agencies and workers to pursue such claims, says Joel Van Parys, an associate attorney with Carlton DiSante and Freudenberger in Sacramento, Calif.
Employers that are pretty clearly misclassifying workers might enter the amnesty program, despite the risks.
"Often these amnesty programs are followed by (the IRS) cracking down" on a particular abuse, says Bill Norwalk, a tax partner with accounting firm Sensiba San Filippo. "If I had someone who was pushing the envelope, I would have them consider" applying for amnesty.
Employers who believe they are clearly in the right probably won't enter the program.
Employers who might have a problem but don't want to enter the IRS program might reclassify workers, "but change the structure of the job so they can say on a going-forward basis, here are your new duties. They are not really independent contractor duties," says Jim Brown, an employment lawyer.
The IRS program does not make it any easier to determine who is and is not an employee. There are various tests, but most employers look at a list of 20 factors put out by the IRS. The IRS has never said how many of these factors qualify a worker as an employee.
"It's an overall facts and circumstances" situation, says attorney Robert W. Wood of Wood LLP. "There ought to be a better way."
In general, the more control an employer has over how, when and where workers do their job, the more likely they are employees.
Not all contractors are or even want to be employees. Many enjoy "the freedom to come and go, do other projects at the same time or pay someone to help on a project," says Stephen Hirschfeld, a partner with Curiale Hirschfeld Kraemer.
He says employers who employ contractors should take a look at the program. "The IRS is sending a message to the employer community, they are going to start aggressively enforcing the law on this," he says.