Misclassification: DOL and IRS Declare War

Walters, who is a consultant with the FiveL Company in Westminster, MD, offered her tips at SHRM’s Employment Law and Legislative Conference, held recently in Washington, DC.

As one indicator of what’s in store for employers, says Walters, note that the Congressional budget includes $14 million to combat misclassification, including $10 million for grants to states to identify misclassification and recover unpaid taxes and $4 million for personnel at the DOL Wage and Hour Division to investigate misclassification.

Another factor that means more scrutiny is memoranda of understanding (MOUs) between DOL, IRS, and some states that the various agencies will share information, says Walters.

Why Is Misclassification Such an Issue?

A lot of entities—from DOL and IRS to state agencies for taxes, workers’ compensation, and unemployment—believe they are losing money to misclassification, and they want to get it back. For example:

• Federal and state income tax withholding
• Social Security taxes
• Medicare taxes
• Unemployment
• Workers’ comp

There are also concerns around:

• Application of minimum wage and OT
• Discrimination
• Health care benefits
• Paid and unpaid leave benefits

Walters focused first on two areas where she sees many mistakes in classification, unpaid summer interns and “volunteers.”

---

Operate in multiple states? That’s a real compliance challenge, but with 50×50 (50 Employment Laws in 50 States); answers are at your fingertips. Wage/hour? Leave? Child labor? Discrimination? All there in easy-to-read chart form. Get more details.

---

What Are the Rules for Unpaid Interns?

Summer’s coming, Walters says, so be sure you are properly treating your unpaid interns. DOL regulations require that:

• The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
• The internship experience is for the benefit of the intern;
• The intern does not displace regular employees, but works under close supervision of existing staff;
• The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
• The intern is not necessarily entitled to a job at the conclusion of the internship; and
• The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Volunteers

Under the FLSA, employees may not volunteer services to for-profit private sector employers.

However, for religious, charitable, or similar non-profit organization, the rule is different. Individuals who volunteer or donate their services, usually on a part-time basis, for public service, religious or humanitarian objectives, not as employees and without contemplation of pay, are not considered employees of the religious, charitable or similar non-profit organizations that receive their service

---

Finally, an easy-to-use state law guide for all 50 states plus DC and Canada! 50×50 (50 Employment Laws in 50 States) guide is the authoritative guide to 50 of the most crucial employment laws. Easy-to-read chart format. No legalese. Just updated for 2012. Get more information here.

---

So What Are the Rules for Independent Contractors?

It depends! says Walters. There are at least three different guides: EEOC, IRS, and the Supreme Court.

According to the EEOC, the indicators that a worker is an employee—not an independent contractor—are:

• The work does not require a high level of skill or expertise.
• The agency or employer, not the worker, furnishes the tools, materials, and equipment.
• The work is performed on the premises of the agency or employer.
• The worker and the agency or employer have a continuing relationship.
• The agency or employer has the right to assign additional projects to the worker.
• The agency or employer sets the hours of work and the length of the job.
• The worker is paid by the hour, week, or month instead of a set fee for performing a particular job.
• The worker has no role in hiring and paying assistants.
• The work is part of the regular business of the employer.
• The worker does not have a distinct occupation or business of his or her own.
• The agency or employer provides the worker with benefits such as insurance, leave, or workers’ compensation.
• The agency or employer withholds federal, state, or social security taxes on behalf of the worker or should do so.
• The agency or employer can discharge the worker.
• The worker and either the agency or employer believe they are creating an employer/employee relationship.

In tomorrow’s Advisor, IRS and Supreme Court guidelines, plus an introduction to the “50×50,” a unique guide to fifty employment laws in fifty states.