Try to avoid federal ‘help’

The U.S. Department of Labor Promises help is on the way. What comforting words … help is on the way. But why don’t I feel better?

“Work in Progress,” the official blog of the U.S. Department of Labor, published on Sept. 25, 2014 a post titled “Misclassification Prevention – Help is on the Way.” Here are the first two paragraphs of the post.

“Worker misclassification has been a problem for this nation’s workforce for a long time, one that my office and others in the Department have been working hard to address over the past four years. If someone is working and getting paid for that work, why should government care about whether the worker is an independent contractor or an employee?

“It matters because worker misclassification deprives the most vulnerable of our workforce of basic worker protections.  Misclassified workers are often denied access to critical benefits and protections – such as family and medical leave, overtime, minimum wage and unemployment insurance – to which they are entitled. That means employees don’t receive a fair wage, are not protected when injured on the job, and possibly do not receive unemployment benefits when they are needed most.”

If a business is purposely paying their workers as independent contractors for the sole purpose of not paying their workers social security taxes or unemployment insurance, then maybe the Department of Labor has a point. I don’t believe it is appropriate or even smart to see how little you can pay your labor. So I agree with the third paragraph of this Department of Labor article which states: “Equally important, employers who try to follow the law cannot compete on a level playing field with employers that violate the law by misclassifying workers.”

However, there is a certain tone to this article that concerns me. In the second paragraph the author wrote: “Worker misclassification deprives the most vulnerable of our workforce of basic worker protections.”

A description that equates “worker misclassification” as a method that is used to “deprive the most vulnerable of our workforce of basic worker protections” is worrisome to me. It is worrisome because if the Department of Labor has promised that “help is on the way,” I expect it means one thing. If they keep their word then businesses, small businesses, can expect an increase in employer audits, audits which cost small businesses precious time, resources and money.

If a business is operating willfully out of compliance with governing laws and regulations and are assessed fines and penalties, they really shouldn’t whine. But the innocent often get rounded up and executed when the government initiates a cause for the protection of the “vulnerable,” specifically the “vulnerable” that vote the right way.

Historically, the Internal Revenue Service has policed businesses and prevented the most egregious businesses from taking advantage of the “vulnerable” because these same vulnerable people might not report all their income. They examine businesses regularly and as part of each examination they look for people who the business may have paid “non-employee compensation” rather than wages and then they assess stiff penalties for businesses found to pay workers as contractors when they are really employees.

So if the IRS has effectively been policing this area of abuse for years, why now has the Department of Labor decided to send “help?”

The IRS has been tightening the screws on this area of worker misclassification for years. If a business makes the effort, they can read the IRS publications and within reason, determine who should be classified as an employee and who is properly classified as an independent contractor. If a business disagrees with the IRS’s conclusion, there are procedures established by the IRS to appeal the decision without getting an attorney involved. I’m not an expert in the procedures of the Department of Labor, but I don’t think they are as friendly toward a business as the IRS. As a business professional, this may seem a little scary.

But here is the scary part.

The U.S. Department of Labor is trying to hide behind each state’s “Department of Workforce Services” by dishing out federal grants to the states so they can “increase their capacity for preventing and detecting worker misclassification” by methods that include “implementing targeted audit strategies to focus on those employers most likely to misclassify workers,” and “establishing a state-wide task force to target egregious worker misclassification schemes.” This is brilliant. When a small business is improperly assessed penalties and their troubles make the headlines, and it will happen, the state agency will get blamed, not the Department of Labor.

I’m getting a bit off topic. Back to the scary part. When it comes to worker classification, a business needs rules to follow, but a business also needs a government that is reasonable when applying those rules. The Arkansas Department of Workforce Services is iffy at best when it comes to “reasonable” when applying their test as to whether a worker is an employee or an independent contractor. I’ll use Potts and Company as an illustration.

For several years I let a young lady clean my office. I gave her a key and told her to come clean once a week. That was the full extent of my instruction. I know little about cleaning, so I couldn’t train her. She had a full time job elsewhere. She was laid off her fulltime job and applied for unemployment. She was asked if she worked anywhere else and she told them she cleaned my office once a week. That resulted in a telephone call and a few questions.

Mr. CPA didn’t think anything about the conversation. I know the rules about what makes a worker an employee or an independent contractor, especially the IRS rules and was convinced I was properly paying this lady as an independent contractor. By everything that I have read and been taught, she was an independent contractor … except for Arkansas’ Department of Workforce Services. It appears I made the mistake of letting this lady use a vacuum cleaner owned by Potts & Company. That transformed her into an employee. So I got ready to fight. It wasn’t much money but it was the principle of the matter.

I started reading the law and hmmm. Here is what I had overlooked. The Arkansas Code “defines employment for unemployment insurance purposes as: Service performed by an individual for wages shall be deemed to be employment subject to this chapter irrespective of whether the common-law relationship of master and servant exists, unless and until it is shown to the satisfaction of the Director that …”

How do you fight that? It is up to the satisfaction of the Director. Common law and the master-servant relationship, a concept used for hundreds of years because it makes good sense isn’t relevant in Arkansas.

Here is my point. A business leader in the current climate has to be aware that there is not one law, one rule, or one authority to follow. Laws and their interpretations change. People in authority and their particular “satisfactions” change. You can be compliant with one agency but be afoul of another. The Department of Labor apparently doesn’t think the IRS does a good enough job policing worker classification issues and I predict the Department of Labor will make the IRS look reasonable when it comes to their interpretation of who should be an employee. Worker classification is a matter which you shouldn’t be careless.

Our government regulates businesses by creating fear. Big businesses have large budgets and staff attorneys to fight for them. Small businesses just need to be a bit fearful. If you are paying individuals as non-employees (lawn man, handyman, janitorial service, etc.), be cautious. You might be the example for which the Department of Labor and the Department of Workforce Services are hoping to “help.”