Sperm Oil Legal Alert: Can You Sue under the Tax Code for Independent Contractor Misclassification?

Sue tax code independent contractor misclassification

When laws are well-written, they’re really specific so everybody knows what you can and cannot do. For example, Title 21, Section 173.275(c) makes it a federal crime to use more hydrogenated sperm oil in food than necessary to accomplish the intended lubricating effect of the sperm oil. (Thanks @CrimeADay!)

Some laws, on the other hand, leave room for interpretation. That’s when lawyers can get creative.

A drapery hanger in Maryland filed a lawsuit alleging that he was misclassified as an independent contractor and should have been paid overtime like an employee. He sued under the usual federal and state laws, but he added a bit of creativity.

The Internal Revenue Code includes a section allowing someone to sue if an evildoer “files a fraudulent information return with respect to payments purported to be made to any other person.” That’s 26 USC 7434, for those keeping score at home. And USC refers to the United States Code, not OJ Simpson’s alma mater.

The drapery hanger included this claim in his lawsuit, alleging that the sole proprietorship that allegedly owed him overtime pay also violated this law by filing 1099s instead of W-2s.

Points will be awarded here for creativity, but those points cannot be used in court. Federal courts don’t take points. (This was not addressed in law school.) All points awarded may be applied to future discounts at your local gas station. No purchase necessary. Void where prohibited.

The court said, nice try but no. This section of the Code refers to the filing of fraudulent amounts of pay, not filing the wrong form.

Had the decision gone the other way, a claim under this section of the Code could be tacked onto just about every independent contractor misclassification lawsuit. And we don’t need that hassle. There are already enough laws that cover misclassification. And sperm oil.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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What is the Test for Independent Contractor vs. Employee? (Jan. 2019)

what is the test for independent contractor misclassificationSeems like a simple question, but it isn’t. My question to your question is, “Why do you ask?” That’s because the test for Independent Contractor vs. Employee is different under different laws.

And worse, the tests keep changing, as we saw in Monday’s post about the NLRB’s SuperShuttle decision.

As of today, January 31, 2019, here’s where we stand:

The current tests for determining Independent Contractor vs. Employee are:

National Labor Relations Act (NLRA)

Right to Control Test (SuperShuttle version, as of 1/25/19)

Title VII, Age Discrimination in Employment Act (ADEA), ERISA

Right to Control Test (Darden version, or some variant of it, as applied circuit by circuit)

Internal Revenue Service

Right to Control Test (IRS version)

Affordable Care Act

Right to Control Test (emphasis on particular factors, based on regulation)

Fair Labor Standards Act (FLSA)

Economic Realities Test (which different courts articulate differently)

California, Massachusetts wage & hour laws

ABC Tests (strict version of Part B)

New Jersey wage & hour

ABC Test (regular version of Part B)

California state laws other than wage & hour

S.G. Borello & Sons Test (customized hybrid version of Right to Control & Economic Realities Tests), we think, for now

State Unemployment and Workers Comp Laws

Pick a card, any card. Tests vary substantially state to state. Some are Right to Control Tests, some are ABC Tests, some are entirely made-up, customized tests that require consideration of — or proof of — specific factors

Other State Laws (wage & hour, discrimination, tax)

Tests vary significantly state by state, law by law

This chart may be a helpful start, but three significant challenges remain, when trying to determine Independent Contractor vs. Employee.

  1. Fifty Shades of Gray.  These tests, for the most part, are balancing tests. Courts and agencies must weigh multiple factors. In most instances, some factors will favor contractor status and some will favor employee status. Different courts may reach different conclusions, even with the same facts.
  2. Planes, Trains, and Automobiles. Multi-state employers face the added challenge of having to deal with different tests in different states. Then, just to keep everyone on their toes, states generally apply different tests for different state laws. Sometimes different tests apply in different industries too. Transportation workers, for example, may be subject to different tests than construction workers.
  3. Into the Wild. The tests keep changing. In January 2019, the NLRB changed its test in the SuperShuttle case. In 2018, California changed its test under state wage and hour law from the S.G. Borello balancing test to a strict ABC Test. In 2015, New Jersey switched to a different version of an ABC Test for its state wage and hour law. The times they are a-changin.

What to do about it? (Free tips!)

  1. Know the tests that apply where your business operates.
  2. Construct your independent contractor relationships in a way that tends to favor the factors supporting independent contractor status. Inevitably, business considerations will get in the way, and tough decisions will have to be made about how much control can be relinquished and how the relationships need to be structured. Adjust the facts of the relationship.
  3. Use a customized independent contractor agreement that emphasizes the factors that support independent contractor status. Avoid off-the-shelf agreements. Merely reciting that everyone agrees the relationship is an independent contractor relationship is only a teeny bit helpful. “Teeny bit helpful” is not the gold standard.
  4. Re-evaluate existing relationships, and make changes from time to time.
  5. Implement a gatekeeper system to prevent operations managers from entering into contractor relationships that may be invalid. Require any retention of a contractor to be approved by a point person, who can issue spot and seek help in evaluating whether a contractor relationship is likely to withstand a misclassification challenge.
  6. Seek legal help before you get audited or sued. Now is the time to review and modify relationships to reduce the likelihood of a misclassification claim. Once a claim is made, your business can only play defense. Create your playbook now, before the defense has to take the field.

For more information on joint employment, gig economy issues, and other labor and employment developments to watch in 2019, join me in Philadelphia on Feb. 26 or Chicago on Mar. 21 for the 2019 BakerHostetler Master Class on Labor Relations and Employment Law: Meeting Today’s Challenges. Advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com. If you list my name in your RSVP, I will have your registration fee waived.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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When Sharks Talk to Bears: Beware of Cross-Agency Communications When Defending Independent Contractor Misclassification Claims

Shark independent contractor misclassification information sharing agreements

According to National Geographic, A 20-year old Colorado man has been bitten by a shark, a bear, and a snake.

Either the animal kingdom hates this guy, or he simply tastes delicious.

Formal information sharing across species is probably unusual, but within government agencies, it’s a thing. Businesses need to be aware of cross-agency information sharing when defending audits and defending agency enforcement actions related to independent contractor misclassification.

Federal and state agencies are particularly focused on sharing information about independent contractor misclassification. The Wage and Hour Division of the DOL has signed information sharing agreements with 27 states. The IRS and the DOL have a Memorandum of Understanding. Tax agencies share information too.

This network of cooperation can spell trouble for businesses undergoing 1099 audits or other agency investigations related to potential independent contractor misclassification.

A small assessment by a state agency may not seem like it’s worth fighting, but beware. Information sharing agreements may cause the assessment to multiply. Adverse findings might also be discoverable in litigation if there’s a civil lawsuit.

In other words, you could be viewed as an easy target, having been found already to be in violation.

A finding of independent contractor misclassification by one state agency may feel like a minor snake bite (I don’t know if there is such a thing as a minor snake bite, but stay with me here).  The snake, however, may share information with the shark, who will tell the bear, and before you know it, you’re that guy in Colorado who’s been bitten by all three.

Ouch!

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Like a Drunken Possum, NEW GIG Act Fails Again.

NEW GIG act possum

Screenshot from DailyDot.com, 12/3/2017

I feel bad for this little guy. This possum apparently broke into a Florida liquor store, knocked over a bottle of bourbon, and got sauced. Wildlife rescue picked him up and checked him into rehab (no, not that kind). Full coverage here at DailyDot.com.

I applaud the critter’s effort, though.

He probably feels a little like Senator John Thune (R-SD), who has repeatedly introduced a bill called the NEW GIG Act — designed to simplify tax law for independent contractor misclassification scufflaws. Every time he gets close, though, someone knocks him over the head with a bottle. Or something like that.

The NEW GIG Act has been introduced in Congress several times. If passed, it would Continue reading

Should Businesses Reclassify Workers as Contractors for 2018? (Or, Why You Shouldn’t Paint Your Dog)

Independent contractortax plan - don’t paint your dog

The Republicans just threw a bone to independent contractors with their new tax law. What does that mean for businesses? Let’s examine.

Strategy question for businesses: Now that tax law provides more favorable tax treatment to independent contractors (see more here), should business reclassify workers as contractors for 2018?

If that’s your reason, then no.

Suppose a new law required ice cream shops to give free cones to dalmation owners. This would be a stupid law, but stay with me.

If I paint dots on a yellow lab, do I get free ice cream?

No, of course not. Even I call my yellow lab a dalmation, it’s still a lab.

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How Does the New Tax Plan Affect Independent Contractors?

In 1985, Simple Minds released the song, Dont You (Forget About Me). Despite the most ridiculous looking dancing you can imagine (under a chandelier, in front of TV screens, adding to the mood ???), the video was nominated for two MTV Video Music Awards.

The preposterous dance moves are pretty simple, though, which seems fitting for a band named Simple Minds.

Simplicity is the overriding theme here. Despite the overall complexity of the newly enacted tax plan, one thing is simple: The tax plan is good news for independent contractors.

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Reminder: Jan. 31 Deadline for Filing Independent Contractor Forms

new year 2018Businesses that retain independent contractors need to remember to file their tax forms. The 1099-MISC forms used for reporting payments made to independent contractors are due to the IRS on January 31st. The payments are to be reported in Box 7. Click here for more helpful filing tips from your friends at the Internal Revenue Service.

Generally, the IRS requires a Form 1099-MISC to be issued for any independent contractor who is paid $600 or more in any year.

How do you know whether you have to file a Form 1099-MISC? The IRS advises that if the following four conditions are met, businesses (or individuals) must report a payment as nonemployee compensation:

  • You made the payment to someone who is not your employee;
  • You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
  • You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
  • You made payments to the payee of at least $600 during the year.

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