Our New York Department of Labor Audit Attorneys have been seeing more and more employers being investigated by the New York State DOL, Unemployment Insurance Division for non-payment of unemployment insurance benefit taxes. In general, employers must pay 6.1% of each employee’s first $8,500.00 in earned wages for the aforementioned taxes. The rise in audits is a result of misclassification penalties issued by the government. In an effort to raise revenue for New York State, the DOL has been scrutinizing companies that use independent contractors who should be treated as employees. It is possible that this classification was proper and legal but many employers are unprepared to defend and fight the audit. In some cases, employers decided to simply pay the alleged back taxes owed for unemployment insurance benefits so that they can spend time running their business. This decision can have disastrous results as the New York State Department of Labor, Unemployment Insurance Division, shares its information with the New York State Worker’s Compensation Board. Shortly after these companies decide to pay the unpaid unemployment insurance benefit taxes, which are generally not significant, they are surprised to learn that they are hit with a tremendous bill (in many instances over $50,000.00 in penalties) from the New York State Worker’s Compensation Board. Critically, these employers’ defenses may be compromised from their earlier admission by paying the New York State Department of Labor taxes. Companies and employers must strategically consider all of its responses to government agencies, especially agencies that could issue penalties in excess of $50,000.00. Furthermore, these companies could be sued by former “employees” for unpaid overtime pay and denial of fringe benefits. The class-action implications of this type of lawsuit are substantial as Microsoft learned in the 1990’s. In that case, a Court determined that Microsoft misclassified workers as independent contractors and the former “employees” were awarded fringe benefits, which were tremendous, because they included valuable stock options.
The IRS has issued the following guidance regarding independent contractors:
There are three characteristics to determine the relationship between businesses and workers:
Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
Companies are advised to carefully consider anytime they use an independent contractor to determine if that is the proper classification indeed. Moreover, small businesses should seek the advice of experienced employment law counsel if they are audited by the DOL or issued a penalty by the Workers Compensation Penalty. Our New York Lawyers have assisted many small business owners and homeowners and saved them over one million dollars in fines by the WCB. Call now at (800) 893-9645 to speak with one of our employer penalty defense attormeys.
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