On September 21, 2011, the Internal Revenue Service (“IRS”) announced its new worker misclassification amnesty program, which is designed to encourage employers that have wrongly classified any of their workers to come forward and correctly classify their workers as employees going forward. Officially called the Voluntary Classification Settlement Program (VCSP), the program is the IRS’s attempt to “enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers”.
So, what kind of deal is on offer in this amnesty program? Basically, the IRS is offering a settlement that will allow employers to pay an amount equal to about only 1% of wages paid to the misclassified workers over the past 12 months, plus it offers to waive all penalties and fees that would otherwise be due. If you are an employer with a misclassification cloud looming over your head, this represents a major opportunity to get into compliance and clean up your act. So, how can you get in on the deal?
According to the IRS’s announcement:
To be eligible, an applicant must:
- Consistently have treated the workers in the past as nonemployees,
- Have filed all required Forms 1099 for the workers for the previous three years
- Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers
Fairly straight forward, right? Big discount, and an easy process. What’s not to like about it? So, you ask, why the reference to the spider and the fly in the title of this article? Well, although federal tax liability for worker misclassification
“So what?” you say,
Everybody knows that government agencies don’t talk to each other! I’ll cut a deal with the IRS, and then let the misclassification issue fade away like a distant memory.” There was a time not so long ago when such a strategy may have been sound, but now things are vastly different.
Why? because as nice as the IRS seems to be in offering this great looking deal, once you come forward and take advantage of the program, they will be having a chat with certain other government agencies that do not intend to be quite so nice to you. Specifically, the IRS will be sharing information about its misclassification cases with the federal Department of Labor (DOL) and eleven state DOLs, as announced by Secretary of Labor Solis and IRS Commissioner Shulman on September 19, 2011.
The states that are, or will soon be, included are Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah, and Washington.
Suddenly, the IRS deal doesn’t look so great any more. Indeed, now it looks like an invitation into the spider’s parlor! Admittedly, for employers with serious and numerous misclassification concerns, the IRS deal could still be a good option.
However, the choice becomes (1) do absolutely nothing, and gamble that neither the IRS or DOL audits them, or (2) stay under the radar but try to simply convert the misclassified workers to employees on their own, risking the workers waking up and filing a claim in court or with the DOL (which will now call the IRS and state DOL!), or (3) take the IRS amnesty deal AND get hammered by the various government agencies that will surely descend on them after taking the IRS deal.
The first and second options roll the dice in the hope that nobody finds out, but risks maximum exposure to tax, wage, and insurance liabilities. The third offers substantial tax discounts, but all but guarantees exposure to wage, and insurance liabilities. Neither option is particularly appealing since all involve paying potentially large sums of money.
However, misclassification is a serious problem that needs to be corrected (as I have mentioned before). Considering the newly announced plan for inter-agency cooperation, and the new amendments to the New York wage and hour law, employers should clean up their misclassification issues sooner rather than later.
With enhanced criminal penalties and 100% liquidated damages for wage violations committed after April 2011, the stakes are much higher for New York employers now. Still, each employer’s situation is different, making it imperative that they conduct a full legal and strategic analysis before choosing a particular course of action. As such, employers considering the IRS VCSP should first consult with experienced labor and employment counsel. Above all, they need to recognize that as good as the IRS VCSP may ultimately be for certain employers, it is far less appealing than it first appears, and comes with significant strings attached.
In short, they should definitely look this gift-horse in the mouth
Shaun C. Reid, Esq. is a labor, employment, and immigration law attorney. As the Principal of Reid Kelly, P.C. law firm, he advises clients on all aspects of employment law, immigration, and labor relations, and provides human resources counseling. His practice includes employment discrimination litigation, unfair labor practice litigation, NLRB representation proceedings, collective bargaining, involvement with grievance arbitration procedures, drafting and implementation of personnel policies, and advising clients concerning compliance with applicable labor and employment laws, wage and hour standards, and other general workplace guidelines.
Prior to founding Reid Kelly, P.C., Mr. Reid served as the General Counsel and Director of Labor Relations of a retailer based in New York City. Prior to that, he served as an Associate Attorney for a boutique management-side labor and employment law firm in New Jersey and New York. He has also served twice as a legal intern at the U.S. Equal Employment Opportunity Commission’s New York District Office, and as a legal intern in the U.S. Bankruptcy Court, Southern District of New York. He is a proud graduate of Fordham University School of Law, and is admitted to the Bars of New York and New Jersey, and the Federal Courts in the Southern and Eastern Districts of New York. He is a member of the New York City Bar Association, The Brooklyn Bar Association (member, Labor & Employment Law Committee), The Brooklyn Chamber of Commerce, the MBBA (member, Labor & Employment Committee), and NAAAHR-GNY (member, Legal Committee).
Mr. Reid volunteers his time with several legal services organizations on matters related to immigration and consumer debt.
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