The perennial issue of the standards for classifying workers as independent contractors or employees is heating up again. The trucking industry has half a million reasons to care. That's the number of “non-employer” trucking businesses that existed in 2005, according to Census Bureau data.
The stakes are as large as the number of workers involved. If the IRS or a state income tax agency finds that a company has improperly treated a worker as an independent contractor rather than an employee, the company can be liable for taxes, penalties and interest for failing to withhold, report and remit the proper amount. The totals could reach tens of thousands of dollars per employee and may affect all of a company's drivers and several years of tax returns.
The consequences go beyond income, social security and unemployment taxes. Employees may be eligible for retirement, health and other benefits that are not available to independent contractors.
Three new salvos were fired in quick succession recently. New York Gov. Eliot Spitzer signed an executive order creating a joint enforcement task force to enable state agencies to coordinate investigations and enforcement efforts regarding worker status.
The Treasury Inspector General for Tax Administration issued a report saying IRS had failed to match nearly 4-million income statements to tax returns for 2004. Nearly $150 billion in payments to non-employees could not be computer matched to a tax return because of erroneous or missing taxpayer ID numbers.
Such a large “tax gap” may lead Congress to penalize companies that fail to verify the validity of ID numbers on the information returns they file. Indeed, the Bush Administration last February recommended as one of its budget proposals that businesses be required to withhold taxes from contractors whose identification numbers do not match IRS records.
Congress hasn't acted yet on that proposal. But in September, four Democratic Senators introduced the “Independent Contractor Proper Classification Act.” The bill would allow the IRS to issue regulations and revenue rulings on employment status, which the agency has been prohibited from doing since 1978. Companies would no longer be able to claim they were safe from having to treat workers as employees if they had followed a “longstanding, recognized industry practice.” Nor could they receive relief from employment tax liability if the IRS found they had misclassified workers.
The bill also would require companies to notify workers of their right to seek a determination of their status from the IRS and their federal tax responsibilities. The IRS and Labor Department would be required to share information with each other and relevant state agencies regarding worker misclassification cases.
The House Education and Labor Committee held a hearing in July on worker misclassification that included testimony from a former FedEx Ground driver who said the NLRB and the Massachusetts unemployment agency had found he should have been treated as an employee. The California Court of Appeals reached a similar conclusion in cases involving FedEx Ground and Sonic delivery drivers.
The bottom line: A multitude of federal and state agencies — and more workers — are showing renewed interest in going after companies that may have misclassified employees as independent contractors. Carriers need to make sure they are following all requirements and be prepared to demonstrate that their practices match their contracts.