Misclassifying Gig Workers

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published September 5, 2022

Overview:  

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “Misclassifying Gig Workers.” You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, Gladys Marcos – Immigration Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: “Misclassifying Gig Workers.”

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

A few weeks ago, we discussed the gig economy and the differing obligations for gig workers depending on if they were classified as an employee or independent contractor. Today, we’re going to continue that discussion from the employer perspective.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “Misclassifying Gig Workers.”

Let’s jump right in,

Question 1: What does it mean to misclassify a worker and how does it happen?

 

Attorney Answer – Question 1:

Hello Alexis.

Employee misclassification is the practice of treating workers as independent contractors, rather than employees.

If you recall from our podcast a few weeks ago where we discussed the tax implications for gig workers, I stated that employers classify workers based on their degree of control and independence in the relationship, using three main categories:

  • Behavioral control
  • Financial control
  • Relationship type

Worker misclassification can be unintentional, but sometimes employers are incentivized to misclassify workers in an attempt to cut costs. When workers are classified as independent contractors, employers avoid complying with payroll withholding and reporting laws; they avoid paying FICA taxes; and they avoid covering the workers under workers compensation and unemployment insurance programs.  All such avoidance is in violation of federal and state tax and labor laws.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

That leads me right into my next question –

Question 2: What are the consequences for employers if a worker is misclassified?

 

Attorney Answer – Question 2:

That’s a great question.

Ultimately, it is the employer who is responsible for correctly classifying workers, so misclassification can lead to a variety of penalties and liabilities for employers.

State Consequences

Within the state of Texas, employers are subject to the Texas Unemployment Compensation Act (TUCA) and are liable to pay unemployment taxes for employees. Misclassification can subject employers to fines and increased taxes and interest charges.

  • If the employer is operating under a government contract, a fine of $200 per worker is assessed for each misclassified worker.

Federal Consequences

Federally, employers are subject to the Fair Labor Standards Act (FLSA) which mandates minimum wage and overtime pay in the United States. Criminal penalties and liability for back wages may be levied against employers and executives who violate this law (whether willfully or not).

There are also federal tax consequences for misclassification. If it is determined that the employee was in fact misclassified, the IRS may require the employer to pay the employer’s share of the FICA tax for the period of misclassification.

On top of this, the employer may also be required to pay the employee’s share of the FICA tax, FUTA tax, and income tax.

  • This is significant because the employer is now having to pay 100% of the payroll tax associated with having an employee rather than splitting that cost with the employee.

If the IRS determines that an employer willfully misclassified their workers, penalties are even greater.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Wow, these are serious penalties.

Question 3: How can employers avoid misclassifying workers? Is there any relief for employers who do misclassify employees?

 

Attorney Answer – Question 3:

Form SS-8

Form SS-8 is the first step to avoid worker misclassification.

If an employer is having trouble determining worker status, or if an employee does not agree with how their employer has classified them, Form SS-8 can be filed with the Internal Revenue Service. Once filed, the IRS will make the ultimate determination on how to classify the worker in question.

  • If the IRS believes an employer has misclassified an employee, employers may be responsible for back-pay.

Section 530 Relief

The IRS has also provided another avenue of relief with Section 530 of the Revenue Act. Section 530 acts as a safe harbor provision, and terminates an employer’s employment tax liability for misclassified workers if three conditions are met:

  1. Reporting consistency;
    1. Employers must have timely filed all required returns consistent with their treatment of the worker as a non-employee. (For example, if the employer claims the worker is an independent contractor, Form 1099 must have been filed for all the taxable years at issue).
    2. If no information return requirement exists for a particular tax period, relief will not be denied on the basis that the return was not filed.
  2. Substantive consistency;
    1. If the employer or predecessor treated the worker, or any worker holding a substantially similar position as an employee at any time after December 31, 1977, the employer will not be eligible for relief from penalties associated with misclassification of workers.
    2. The IRS determines whether to grant relief for misclassification of workers based on all the facts and circumstances. The Service reviews the day-to-day services performed by the worker and compares the job functions performed to those performed by other workers properly classified as employees. The mere fact of similar job titles or categories alone are not sufficient to doom the employer’s request for penalty relief.
  3. Reasonable basis.
    1. The employer must have reasonably relied on one of the following three “safe harbors”: 1) prior audit; 2) judicial precedent; or 3) industry practice.
    2. Employer must have relied on the alleged authority at the time the employment decisions were being made for the periods at issue.

Despite Section 530 being available, few employers actually qualify for relief because they are unable to provide a reasonable basis for misclassifying the employee.

  • Employers who do not qualify for Section 530 relief will be assessed employment taxes (and even trust fund recovery penalties if necessary).

Classification Settlement Program (CSP)

For employers who are under examination but do not qualify for Section 530 relief, they may seek relief under the Classification Settlement Program (CSP). The CSP allows employers to work with IRS examiners and negotiate an agreement to lower their employment tax burden.

  • To qualify for CSP, employers must have reporting consistency. That means that the employer must have timely filed Form 1099 for workers classified as independent contractors.
  • In order for an employer to obtain relief under CSP, the employer must receive a CSP offer from the IRS and agree to prospectively reclassify workers as employees.

Voluntary Classification Settlement Program (VCSP)

The last option available for employers for relief from penalties associated with misclassifying its workers is the Voluntary Classification Settlement Program (VCSP). The VCSP allows employers to voluntarily reclassify workers for future tax periods with limited federal employment tax liability for past non-employee treatment.

  • To qualify for the VCSP, employers must have reporting consistency and cannot be under IRS audit examination.

 

Alexis, to summarize here:

There could be many reasons why employers misclassify workers; it is not always intentional.

However, misclassification of workers is not a victimless infraction or failure to comply with federal and state laws:

  • The misclassified workers are harmed because they are paying self-employment taxes when they should not be paying them. In the long-term, misclassified workers are harmed when they retire and beginning to receive social security benefits since their social security wages are likely understated.
  • The integrity of the overall U.S. tax system is harmed because often times when workers are misclassified the correct amount of tax is not paid; that is, neither the employer nor the worker pay the income taxes which are required to be withheld from employee’s paychecks.
  • The industry and the U.S. economy are harmed when workers are misclassified because unfair advantage can be achieved by those employers who are misclassifying their workers.

 

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain what it means to misclassify workers, the penalties in place to prevent misclassification, and the available relief for employers who realize they have misclassified their workers. Misclassification of workers as independent contractors when they should be classified as employees is clearly not victimless!

It seems like the take away here is that employers need to be careful and mindful when classifying their workers to avoid all the possible consequences resulting from misclassifying their workforce as independent contractors when they should be classified as employees.

To our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone! And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

 

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “Misclassifying Gig Workers.”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.