March 2010

By: Nancy E. Joerg, Esq.

Frightening times are ahead for companies who use independent contractors.

If the Obama budget for 2011 passes, the Internal Revenue Service (IRS) will add 100 new enforcement personnel as part of a $25 million plan to crack down on the misclassification of workers as independent contractors. Obama officials hope stronger misclassification enforcement will add $7 billion to the federal government over the next decade.

Obama’s very tough enforcement program comes from an executive order to reduce improper payments to independent contractors by “intensifying efforts to eliminate payment error, waste, fraud and abuse in the major programs administered by the Federal Government.”

The IRS also recently kicked off a widely publicized three-year audit of 6,000 companies (2,000 per year). Unlike normal employment tax audits, the 6,000 audits are being chosen by pure statistical sampling. And if your company isn’t chosen by the IRS this round, it may be chosen in the next!

Estimates are that companies can hold down labor costs by as much as 30% if they use independent contractors because they don’t have to pay Social Security and Medicare taxes, provide vacation or sick leave, pay for workers’ compensation and unemployment, or worry about minimum wage or overtime provisions.

On top of the IRS crackdown, many states around the United States are cracking down on independent contractor status. In Illinois, for example, new misclassification legislation (called the Illinois Employee Classification Act) and stricter enforcement of this new law resulted in a $328,500 assessment by the Illinois Department of Labor in December 2009 against a Chicago area housing contractor. The housing contractor allegedly failed to keep proper records under the Illinois Employee Classification Act and allegedly misclassified workers as independent contractors instead of employees under the Illinois Employee Classification Act. This case will be appealed, but even if the company eventually “wins,” the legal defense costs will be significant.

It is clear that increased IRS and state focus on these independent contractor issues will also lead to more private civil lawsuits, as the damages available in such independent contractor misclassification cases make them attractive to plaintiffs’ attorneys (for example, class action overtime lawsuits based on independent contractor misclassification is a fast growing legal concern for companies who use independent contractors).

Please contact Wessels Sherman Senior Attorney and Shareholder Nancy Joerg at 630-377-1554, or najoerg@wesselssherman.com, to work on lowering your risk in using independent contractors. At a minimum, have your independent contractor agreements reviewed and possibly redrafted. Go over the manner in which you relate to your independent contractors. There are many effective ways to reduce your risk in using independent contractors.

Questions? Contact Founder and Senior Shareholder Richard H. Wessels of Wessels Sherman’s St. Charles office at (630) 377-1554 or by email at rwessels@wesselssherman.com.