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Construction firms should get proactive with employee classification

September 18, 2015


New guidance handed down from the U.S. Department of Labor could drastically alter the landscape of the construction industry. Now in focus is the definition of “independent contractor,” with the DOL ruling that the current standard is too broad. As a result, more independent contractors may actually be defined as employees.

Naturally, this change will have a significant impact on employers. Independent contractors can be beneficial for construction firms in that contractors don’t require employee benefits, there are no required payments for their payroll taxes and workers’ compensation, and they aren’t eligible for many typical workplace protections, such as overtime and minimum wage.

However, the DOL argues that more independent contractors take away tax revenue from the government and create an unfair playing field for employers. As a result, the new guidance reclassifies many independent contractors as employees.

Who is now an employee?
In the DOL guidance, the agency outlined the key changes to the definitions of employee and independent contractor. At the heart of the changes is the control test, the long-standing tool used by businesses to determine who is, and is not, an employee by determining the amount of control the business has over the worker and how the worker does the job.

Instead of the control test, the DOL suggests that employers categorize all workers based on the Fair Labor Standards Act (FLSA), which defines employment as the ability to “suffer or permit to work.” This definition is extremely broad, and can include many workers who were once considered independent contractors. In fact, the DOL is making a concerted effort to move away from the control test as the old standard.

Following this guidance, the new gauge is whether or not a worker is economically dependent from the employer, while falling under the “suffer or permit to work” definition, which can include control as a factor to consider. True independent contractors are separate businesses economically viable with or without the assistance of the employer. Employees, on the other hand, rely on that employer for economic sustainability.

What does this mean for construction firms?
Historically, construction firms have been major employers of independent contractors. With the new DOL guidance, many of those workers may now technically be employees, even though they are still classified as the former.

This puts employers in a tough fiscal and legal bind. Employers caught misclassifying employees can be severely fined and penalized, including the payment of back federal employment taxes and interest per employee. Misclassification is incredibly easy, especially given the new DOL guidance, so worker review is a must to ensure complete compliance. If an employer needs assistance in determining the classification for a worker, the employer may file a Form SS-8,”Determination of Worker Status for Purposes of Federal Employment Tax and Income Tax Withholding” with the IRS.

If a business determines that it has misclassified employees, there is no reason to fear – the employer has an option to avoid penalties and mitigate the financial impact on the construction firm.

IRS offers Voluntary Classification Settlement Program
The answer for employers is through the IRS’ Voluntary Classification Settlement Program (VCSP). As it sounds, the VCSP is a voluntary program for employers who have accidentally classified employees as independent contractors. Through this program, construction firms can change that classification for a partial relief from federal employment taxes.

By agreeing to the VCSP, employers will have to define the workers in question as employees for all future tax periods. In addition, the IRS also allows:

  • Payment of 10 percent of employment tax liability due on compensation from past tax year
  • Employers to avoid liability for interest and penalties
  • Employers to not be subject to an employment tax audit related to the misclassified employees

To enter the VCSP program, employers must apply using the application Form 8952 at least 60 days before the desired change in classification date. For construction firms, this process is incredibly important. The new DOL guidance, coupled with the already narrow line between independent contractor and employee, could mean many firms have misclassified workers – and might be facing penalties from the IRS. A proactive approach to mitigate the financial impact is in everybody’s best interests.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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