The IRS has announced a new amnesty program aimed at employers who have misclassified employees as independent contractors. The program, called Voluntary Classification Settlement Program, would allow employers to "come clean" and re-classify contractors as employees, and only pay approximately 10 percent of the back taxes. The IRS also promises no audits and no penalties on unpaid taxes.
This sounds good, right? Of course, there is a catch. The deal offers no immunity from overtime suits and other claims which may be brought by the persons who will be converted from independent contractors to employees. Contractors do not receive overtime, while employees must be paid time and one half their regular rate of pay for all hours over 40 in a work week. If the "contractors" were working overtime, the employer could be responsible for up to 3 years of unpaid overtime, plus the potential of double damages and attorneys fees.
The takeaway is that employers considering the IRS' amnesty program should consult with legal counsel before taking a step which could be later viewed as an admission of guilt. Regardless of whether you take advantage of this new program, however, all employers who utilize independent contractors should be on alert. The Department of Labor and IRS entered into an agreement to share information on September 19, 2011 and will be focusing a large amount of personnel and resources into misclassification cases. Now is the time to make sure your contractors meet the classification requirements, and that you have a well drafted agreement which establishes the nature of their duties and responsibilities.
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