Iowa Reaps Impressive Enforcement Results from Worker Misclassification Program

Thursday, March 11, 2010 by Liz Greene

Recent news from America's heartland brings promising results for state-led worker misclassification enforcement. Since launching their dedicated misclassification unit in September of 2009, Iowa, the Hawkeye State, discovered:

• 116 employers misclassified 887 workers as independent contractors
• Total unreported wages were $15,520,738
• Total unemployment taxes due are $555,647
• Total unemployment penalties and interest due are $156,248.

Collaborative efforts between unemployment insurance, contractor registration and workers’ compensation have aided the investigative efforts of Iowa’s misclassification activities. Another key element of the early success in Iowa has been the tip site where individuals (misclassified workers or the business competitors of alleged violators) can merrily report suspected abuse. This initiative proves that the states do not need changes in independent contractor legislation or even the rules for classifying a contractor versus employee in order to crack down on the problem and harvest some of that missing tax revenue. Existing 1099 laws already on the books can serve if state agencies can simply focus on the issue and set up appropriate systems. The workforce division is just warming up and is still relatively new.

This year, Iowa businesses face an average increase of 19 percent in unemployment insurance taxes, a change actually seen across many states as the recession has taken its toll. The rate increase, triggered by state law, is designed to keep Iowa's trust fund solvent at a time when many state funds have gone bankrupt. In December, Iowa had 110,800 workers who were unemployed. By recouping missing unemployment funds from misclassified workers, the state can improve the overall situation . . . although it may be too little, too late.

“Employers that improperly classify their workers as independent contractors create an unfair playing field by lowering their costs of doing business in comparison to employers who follow the law in Iowa,” stated Iowa Workforce Development Director Elisabeth Buck. “Additionally, misclassified workers are denied access to workers’ compensation coverage and unemployment benefits if needed, creating the potential for a greater economic burden to communities.”

Iowa may be the safest state to live in, but with these new developments, it certainly isn't the safest state to misclassify employees as independent contractors. I think the new compliance environment brings a whole new meaning to the moniker, Hawkeye State.


Do you do business in a state with a worker misclassification task force?

Would you even know it if you are?

Are you familiar with the independent contractor test for your state? Have you done a contractor risk assessment for your business?

Leave a note in the comments if you have questions about this or other state level independent contractor compliance initiatives.

Federal Government Contract Talent Crisis: DHS Has More Contractors Than Employees

Wednesday, March 3, 2010 by Liz Greene

It was revealed Wednesday that the workforce of the Department of Homeland Security is composed of more contractors than government employees. The talent ratio for the Department and its 20 associated agencies was called out by Sen. Joe Lieberman, I-CT, and Sen. Susan Collins, R-ME, in the Senate Committee on Homeland Security and Governmental Affairs during budget reviews.

The department estimates it has 200,000 contractors working for it and 188,000 civilian employees (not including uniformed members of the Coast Guard) for a total workforce of almost 400,000, according to information provided by the committee. As reported in the Washington Post, this contract talent reliance is the result of a year of active work in reducing the contingent workforce at the department, which begs the question of what the numbers of independent contractors were before.

According to DHS press secretary Clark Stevens, “Since first taking office, Secretary Napolitano has been strongly committed to decreasing the department’s reliance on contractors and strengthening the federal workforce at DHS. Over the past year, we have been actively converting contractor positions to government positions and will continue to build on these efforts at an even more aggressive pace this year.

While the contract workforce numbers may surprise some, by one count, over 80% of the government’s work is produced by contractors. At the same time, government talent management executives are too often ill-equipped to manage the contract talent workforce effectively, to the point of using contractors to manage contractors. Workforce management on the employee side isn't much better though -- different challenges, such as a demographic tidal wave, beckon. For example, nearly 90% of government senior executives will reach retirement over the next five years, potentially resulting in an exodus of critical leadership. One way to bring that talent back will be to engage retirees as contract labor, bringing them on as Statement of Work Consultants, deepening the workforce trend.

Just one day before the news about DHS’s contract workforce mix became public, on Tuesday, the Center for Human Capital Innovation and a Consortium of organizations, including MBO Partners, launched TMGov.org, the Portal for Talent Management in Government, a site dedicated to research for engineering realistic talent management solutions -- including contract talent management -- for government agencies. Read the TMGov.org press release.

It seems our Federal government has some serious talent management challenges ahead, indeed.

When It Comes to 1099 Compliance, Worker Classification Confusion Abounds, Study Finds

Wednesday, March 3, 2010 by Liz Greene

According to SIA's recent survey of companies that use contingent workers, fewer than one in five are confident that all their 1099 independent contractors are properly classified. Worker classification is a very important issue in contingent workforce management, and refers to whether a given worker is classified as an employee or as an independent contractor.

While the IRS provides a Three Areas of Control test to help determine proper worker classification, different regulatory agencies at the Federal and state levels have different methods for determining classification, so the IRS factors are not the only consideration for deciding whether to pay a worker on a 1099 or W-2. There is no definite, end-all independent contractor test, and in many cases the lines are fuzzy.

What's more, businesses are challenged to properly classify workers regardless of size or sophistication. In the SIA study, rates of compliance were fairly consistent across organizations as a function of company size or as a function of VMS use or MSP use. This means that even enterprises with centralized, managed independent contractor compliance programs still lacked confidence in their 1099 compliance.

Does your company engage independent contractors?

Are you confident in your 1099 compliance, or, like the majority of businesses, do you have risk when it comes to worker classification?

For more learning, watch this video webcast on Vimeo, Independent Contractor Compliance: What You Need to Know, or visit our 1099 Compliance Center.

Maine Misclassification Report Confirms Enforcement Results of Task Force

Wednesday, March 3, 2010 by Jay Lash

In the state of Maine, the Governor's Task Force on Employee Misclassification created in January 2009 has had a productive year, concluding that the state is losing tax revenue as the result of workers being misclassified as independent contractors.

Like many states now, Maine has a hotline and website tip form for reporting suspected worker misclassification. According to the task force's report, the form has generated 27 tips on improper worker classification. "Maine is losing substantial income tax revenue,” the report states. “Reducing misclassification through outreach and better enforcement of the law will help level the playing field for honest employers in the competitive marketplace.”

Interestingly, the states are now collaborating with one another to share best practices and connect the dots to indentify multi-state employers suspected of employee misclassification. Representatives from Maine, Laura Fortman and two other Task Force members, attended the first-ever Northeast Regional Summit of State Misclassification Task Forces which includes Maine, Massachusetts, New York, New Hampshire, Vermont, Connecticut, Rhode Island, New Jersey, and Maryland.

The report defines misclassification as an employer’s designation of a worker as an independent contractor instead of an employee, or in other words, paying them as a 1099 versus W-2. For the state government, improper worker classification results in significant financial effects, and analysts have concluded tax losses to Maine could be as much as $36 million a year.

As reported in the Bangor Daily News, the Governor's reaction was moderate: “This issue has been around for years,” Gov. John Baldacci said when he received the report last week. “I want to see if I can cobble together some additional resources to address this.”

For contract workforce program managers, the new trends in state enforcement and 1099 compliance merely underscore a larger, national trend. State treasuries, stretched by unprecedented unemployment claims and growing deficits, are strapped for cash and looking for lost tax revenue. The Federal government is in a similar position, and the IRS just launched audits of 6000 companies specifically looking for misclassification. Program managers, especially at large employers, can expect the emergence of a new independent contractor compliance climate that will require great diligence and new contract talent engagement approaches.

Double Trouble for Federal Government Contractors Using Independent Contractors

Wednesday, March 10, 2010 by Liz Greene

For any large organization, managing the risks of using independent contractors is a tremendous burden. The whole question of 1099 vs W2 worker classification is perplexing, and the coemployment aspect of 1099 risk plus the fear of contractor lawsuits makes things even murkier.

But for federal contractors -- those organizations that do business with our government -- the bar is set much higher, and the consequences for getting things wrong are far more worrisome.

So what's so special about 1099 risk for federal contractors?


Two things: Enforcement of Tax Compliance, and the new E-Verify rules.


Tax Compliance

Every year, the federal government pays more than half a trillion dollars to contractors from a wide variety of goods and services. Yet, the GAO has discovered that tens of thousands of contractor companies owe the government over $5 billion in unpaid taxes . . . and are still permitted to bid for and win lucrative federal contracts.

In January, President Obama signed an executive memorandum calling out federal contractors that fail to pay their taxes. The action would allow the IRS to share tax information with contracting officers and block federal contractors from winning future contracts if they are seriously tax delinquent.

Those of you who read our Contract Talent Blog regularly may already understand that a company that misclassifies workers as independent contractors -- whether knowingly or unknowingly -- can end up seriously tax delinquent. Getting worker classification right, and applying the correct independent contractor test to ensure 1099 compliance, is critical.

It may be inconvenient for a regular business to have to jump through the compliance hoops to properly handle contract labor and contractor compliance, but for a federal contractor heavily reliant on doing business with the government, this is no longer an option.

Next steps: If you have reason to believe your business is misclassifying employees as independent contractors, it is time to do a full contractor assessment. Seek the guidance of a third party Independent Contractor Engagement Specialist if you do not have the compliance expertise in house.


E-Verify

The second unique aspect that federal contractors face with regard to independent contractor use is E-Verify.

Federal contractors out of compliance with E-Verify can face debarrment from federal contracting, bottom line. And yet, many (if not most) major federal contractors are using independent contractors that would likely not pass a reclassification audit.

These may seem like separate issues, but they aren't. If you are not correctly classifying your workers, and have misclassified employees sitting in the 1099 contractor bucket, then guess what . . . . you have not used E-Verify on those workers.

Next steps: Be sure that the hiring of independent contractors and sub-contractors is highlighted in your business as an area of tremendous risk. Centralizing a compliance process for independent contractor classification should help. Be certain that you implement new risk management processes going forward, and then go back and take care of incumbent 1099s working in your organization.


The Take Away

Independent contractor compliance is, for many businesses, the weakest link. For a federal contractor, the stakes are even higher. Failure to properly classify workers (1099 vs W-2) may be the end of your ability to do business with Uncle Sam in the short term or the long term. Whether the determination comes from the IRs and your tax delinquency, or if it comes from DHS and your failure to use E-Verify on all required employees, you are now being held to a higher standard of compliance.

Unfortunately, 1099 risk isn't going away any time soon. In fact, at every level -- legislation, enforcement, lawsuits -- the climate is getting more rigorous.

The best practice is to perform your own internal audit now -- leveraging the expertise you need from specialists in contract talent risk mitigation -- before a regulatory agency steps in and does it for you.

Or as Nat King Cole sang so memorably, "Straighten Up and Fly Right!"



Bonus: Click here for your complimentary PDF download of, "E-Verify Requirements for Contractors." This paper, jointly produced by MBO Partners and Michael Best & Friedrich, LLP, highlights the special concerns federal contractors should attend with regard to using Independent Contractors and the current E-Verify rules. No registration required for full text access.


Is your business concerned about the new Obama memo on tax delinquency? Or are you confused by the E-Verify requirements?

Federal Government Talent Crisis: DHS Now Mostly Contractors

Posted by Liz Greene

It was revealed Wednesday that the workforce of the Department of Homeland Security is composed of more contractors than government employees. The talent ratio for the Department and its 20 associated agencies was called out by Sen. Joe Lieberman, I-CT, and Sen. Susan Collins, R-ME, in the Senate Committee on Homeland Security and Governmental Affairs during budget reviews.

The department estimates it has 200,000 contractors working for it and 188,000 civilian employees (not including uniformed members of the Coast Guard) for a total workforce of almost 400,000, according to information provided by the committee. As reported in the Washington Post, this contract talent reliance is the result of a year of active work in reducing the number of contractors, which begs the question of what the numbers were before.

According to DHS press secretary Clark Stevens, “Since first taking office, Secretary Napolitano has been strongly committed to decreasing the department’s reliance on contractors and strengthening the federal workforce at DHS. Over the past year, we have been actively converting contractor positions to government positions and will continue to build on these efforts at an even more aggressive pace this year."

While the numbers may surprise some, by one count, over 80% of the government’s work is produced by contractors. At the same time, government talent management executives are too often ill-equipped to manage the contract talent workforce effectively. Workforce management on the employee side has different challenges, such as a demographic tidal wave – nearly 90% of government senior executives will reach retirement over the next five years, potentially resulting in an exodus of critical leadership.

Just one day before the news about DHS’s workforce mix became public, on Tuesday, the Center for Human Capital Innovation and a Consortium of organizations, including MBO Partners, launched TMGov.org, the Portal for Talent Management in Government, a site dedicated to research for engineering realistic talent management solutions -- including contract talent management -- for government agencies. Read the TMGov.org press release.

It seems our Federal government has some serious talent management challenges ahead, indeed.

Tags: federal, management, employees, Napolitano, contingent, contractors, homeland security, DHS, talent, Government

Recovery 2010: The Rise of Contract Talent

Posted by Liz Greene

With the cover of BusinessWeek announcing the era of the “Permanent Temporary Workforce,” it has now become clear to the American public – and not just talent and HR managers in major companies – that the talent economy has fundamentally changed.

In a recent USAToday article, “Quarter of Workforce Could Become Temps as Contract Work Grows,” Garry Mathiasson of Littler Mendelson, a leading employment law firm, affirmed that even as the economy will rebound in the coming months, “half the jobs created in the recovery will be filled by contractors, consultants, and other temps.”

Those who are familiar with the benefits of using contract talent are not surprised by the shift. Fluctuations in the economy paired with a rapidly evolving world together mean that the need for agility is not going away any time soon. An experienced, project-based, just-in-time workforce – composed of freelancers, independent contractors, statement of work consultants, and temporary labor -- brings the right people to fill talent requirements for as long as they are needed, and no longer.

Despite this new reality, most human resources departments do not have the processes, controls and programs to support this level of contingent hiring.

This Wednesday, January 27th at 1:00 pm ET, the Human Capital Institute (HCI), MBO Partners, and our co-sponsors Allegis Group Services, TAPFIN, Guidant Group, Fieldglass, Emptoris, and IQ Navigator will be presenting a webcast, “Recovery 2010: The Rise of Contract Talent.”

Our guest presenter, Bertrand Dussert from American Express, will explore how contingent workforce management is being handled today, and provide guidance on where it needs to evolve into the future. He’ll also cover:

• Best practices for collaboration between Legal, Procurement, Accounting, and HR
• New workforce planning models that take contract talent into account
• Contract workforce programs incorporating MSP / VMS, supplier management, risk management, and compliance
• Practical next steps for your organization to prepare for unprecedented contingent hiring in 2010 and beyond

Register today and you'll also get a complimentary community membership with the Human Capital Institute.

See this and more upcoming events >

The contract workforce is now here. Is your business ready to manage it?

Tags: HCI, workforce planning, recovery, Contingent Workforce Management, contract workforce