THE EMPLOYER EMPLOYEE RELATIONSHIP CHAPTER 1 TOPICS TYPES

THE EMPLOYER – EMPLOYEE RELATIONSHIP CHAPTER 1

TOPICS TYPES OF WORKERS INDEPENDENT CONTRACTORS STATUTORY EMPLOYEES STATUTORY NON-EMPLOYEES 3 RD PARTY ARRANGEMENTS EMPLOYEES MISCLASSIFICATION SETTLEMENT PROGRAMS 2

2 TESTS TO DETERMINE WORKER STATUS (EMPLOYEE VS. INDEPENDENT CONTRACTOR) • COMMON LAW TEST • REASONABLE BASIS TEST Determination of Worker Status Form ■ Form SS-8 3

COMMON LAW TEST • RIGHT TO CONTROL - • WHAT WORK WILL BE DONE AND HOW WORK WILL BE DONE • BEHAVIOR CONTROL – • LEVEL OF INSTRUCTIONS AND LEVEL OF TRAINING PROVIDED • FINANCIAL CONTROL – • • DOES WORKER HAVE UNREIMBURSED EXPENSES? RIGHT TO DIRECT AND CONTROL ECONOMIC ASPECTS OF WORKER’S JOB SERVICES AVAILABLE TO THE PUBLIC? HOW WORKER IS PAID – CAN THEY HAVE A PROFIT OR LOSS? • TYPE OF RELATIONSHIP – • IS THERE A WRITTEN AGREEMENT OR ARE THERE BENEFITS PROVIDED? • HOW WORKER AND BUSINESS PERCEIVE THE RELATIONSHIP TO EACH OTHER • INTENT REGARDING RIGHT TO DIRECT AND CONTROL MANNER OF WORKER’S ACTIVITIES 4

REASONABLE BASIS TEST REVENUE ACT OF 1978 – SECTION 530 RELIEF REQUIREMENTS • REASONABLE BASIS • COURT CASE OR IRS AUDIT • IC BASED ON SIGNIFICANT SEGMENT OF INDUSTRY STANDARDIZATION • ADVICE OF BUSINESS LAWYER / ACCOUNTANT • SUBSTANTIVE CONSISTENCY • PERFORMED SERVICES FOR A TAX-EXEMPT ORGANIZATION • WORKER IS NOT TREATED AS AN EMPLOYEE FOR PURPOSES OF EMPLOYMENT TAXES • REPORTING CONSISTENCY • FILED ALL REQUIRED FEDERAL TAX RETURNS INCLUDING INFORMATIONAL RETURNS 5

FORM SS-8 DETERMINATION OF WORKER STATUS FOR PURPOSES OF FEDERAL EMPLOYMENT TAXES AND INCOME TAX WITHHOLDING • STATUS DETERMINATION MADE BY IRS CODE • DETERMINED BY A SERIES OF QUESTIONS • EXTENT OF EMPLOYER’S RIGHT TO CONTROL THE RESULT • EXTENT OF THE MEANS OF THE WORK PERFORMED • CAN SEVERAL WEEKS OR UP TO SIX MONTHS • WORKER CAN REQUEST FOR A DETERMINATION OF STATUS • COMMON LAW / REASONABLE BASIS TEST DO NOT APPLY • WAITING FOR DETERMINATION – TREAT WORKER AS AN EMPLOYEE • IF IRS FINDS WORKER TO BE AN IC – NO REFUND OF EMPLOYMENT TAX AVAILABLE 6

INDEPENDENT CONTRACTOR (IC) IF A WORKER IS DETERMINED TO BE AN IC: • VALID TAXPAYER IDENTIFICATION NUMBER (TIN) REQUIRED • EMPLOYEE BENEFITS ARE NOT REQUIRED TO BE FUNDED, PAID, OR ADMINISTERED • FEDERAL, SOCIAL SECURITY AND MEDICARE TAXES • NOT WITHHELD FROM EMPLOYEE • NOT PAID BY THE BUSINESS • BUSINESS PROVIDES FORM 1099 -MISC AFTER THE END OF THE YEAR • WATCH FOR STATE REQUIREMENTS OF: • WITHHOLDING AND UNEMPLOYMENT • NEW HIRE REPORTING 7

STATUTORY EMPLOYEES • CATEGORIES - DISH • AGENT DRIVERS / COMMISSION DRIVERS • FULL TIME LIFE INSURANCE SALESPERSONS • TRAVELING / CITY SALESPERSONS • HOMEWORKERS – GOODS AND SERVICES PROVIDED BY EMPLOYER • GENERAL REQUIREMENTS • AGREEMENT THAT ALL SERVICES ARE PERFORMED PERSONALLY BY WORKER • NO SUBSTANTIAL INVESTMENT IN BUSINESS EQUIPMENT / FACILITIES • PART OF A CONTINUING RELATIONSHIP WITH EMPLOYER (NOT A SINGLE TRANSACTION) • NOT EMPLOYEES, BUT SUBJECT TO CERTAIN TAXES • NOT SUBJECT TO: • FEDERAL INCOME TAX WITHHOLDING • SUBJECT TO: • SOCIAL SECURITY AND MEDICARE TAX WITHHOLDING • SOCIAL SECURITY AND MEDICARE EMPLOYER TAX PAYMENT • FEDERAL UNEMPLOYMENT TAX (FUTA) DEPENDING ON THE SITUATION 8

STATUTORY NON-EMPLOYEES • CATEGORIES – REDS • QUALIFIED REAL ESTATE AGENTS • DIRECT SELLERS • GENERAL REQUIREMENTS • COMPENSATION DIRECTLY RELATED TO SALES / OTHER WORK OUTPUT (NOT NUMBER OF HOURS WORKED) • WORK PERFORMED UNDER WRITTEN CONTRACT THAT SPECIFICALLY STATES WORKER NOT TREATED AS AN EMPLOYEE FOR PAYROLL TAX PURPOSES • NOT EMPLOYEES, AND NOT SUBJECT TO TAXES • FEDERAL INCOME TAX WITHHOLDING • SOCIAL SECURITY AND MEDICARE EMPLOYER TAX PAYMENT 9

3 RD PARTY ARRANGEMENTS TEMPORARY HELP AGENCY EMPLOYEES • AGENCY: • HIRES, SCREENS, AND TRAINS • SOLE RIGHT TO HIRE / FIRE • RESPONSIBLE FOR PAYROLL COMPLIANCE • RESPONSIBLE FOR BENEFITS AND HUMAN RESOURCES REQUIREMENTS • BUSINESS: • PAY AGENCY AS DIRECTED BY CONTRACT • ASSURE THAT YOU ARE DEALING WITH A FINANCIALLY SOLID TEMP AGENCY TO AVOID YOUR COMPANY HAVING TO ASSUME LIABILITY IN CASE OF THE AGENCY’S FINANCIAL FAILURE 10

3 RD PARTY ARRANGEMENTS (CONT. ) LEASED EMPLOYEES • LEASING COMPANY: • HIRES, SCREENS, AND TRAINS • RESPONSIBLE FOR PAYROLL COMPLIANCE • RESPONSIBLE FOR BENEFITS AND HUMAN RESOURCES REQUIREMENTS • BUSINESS: • COVERS COST OF PAYROLL, BENEFITS, ETC. • RIGHT TO HIRE / FIRE • SET WAGE LEVELS • SUPERVISE WORK AND PERFORMANCE LEVEL 11

3 RD PARTY ARRANGEMENTS (CONT. ) • A/K/A PEO PROFESSIONAL EMPLOYEE ORGANIZATION • MUST HAVE PEO CERTIFICATION FROM IRS • PROVIDES TO BUSINESS • • HUMAN RESOURCES PAYROLL BENEFITS MANAGEMENT POTENTIAL COST SAVING THROUGH BENEFITS RATE OR UNEMPLOYMENT RATES • SUGGESTED CO-EMPLOYERS OF THE EMPLOYEE • PEO CONTRACTS TO EMPLOYEES AT BUSINESS’ WORKSITE • PEO ASSUMES CERTAIN EMPLOYER RIGHTS, RESPONSIBILITIES, AND RISKS • IRS CERTIFIED: PEO TREATED AS EMPLOYER DURING LIFE OF CONTRACT (CPEO) 12

3 RD PARTY ARRANGEMENTS (CONT. ) PAYER AGENTS • DESIGNATE AN AGENT TO PERFORM THE ACTS REQUIRED OF EMPLOYERS UNDER IRC § 3504 • FORM 2678 • EMPLOYER / PAYER APPOINTMENT OF AGENT • GENERALLY APPOINTED TO ACT WITH RESPECT TO FEDERAL INCOME TAX WITHHOLDING, SOCIAL SECURITY TAXES AND MEDICARE TAXES 13

3 RD PARTY ARRANGEMENTS (CONT. ) OTHER 3 RD PARTY ARRANGEMENTS • PAYROLL SERVICE PROVIDERS (PSP) • REPORTING AGENCIES (RA) • PREPARE / FILE EMPLOYMENT TAX RETURNS UNDER EMPLOYER’S EMPLOYER IDENTIFICATION NUMBER (EIN) • EMPLOYER RESPONSIBILITIES: • ALL DUTIES • EMPLOYMENT TAX LIABILITY RELATED TO WAGES PAID TO EMPLOYEES 14

EMPLOYEES FAIR LABOR STANDARD ACT (FLSA) • BROAD CHARACTERIZATION: • AN EMPLOYEE AS ANY INDIVIDUAL WHO WORKS FOR AN EMPLOYER • US DEPARTMENT OF LABOR’S WAGE AND HOUR DIVISION DEFINITION: • EMPLOYER – EMPLOYEE RELATIONSHIP WHERE WORKER IS “ECONOMICALLY DEPENDENT” ON THE EMPLOYER • REGULATES: • MINIMUM WAGE RATES • OVERTIME PAY • CHILD LABOR • EQUAL PAY 15

EMPLOYEES (CONT. ) JOINT EMPLOYER STATUS • EMPLOYEE HOURS WORKED FOR BOTH EMPLOYERS FOR THE WORKWEEK MUST BE COMPILED AND CONSIDERED AS 1 EMPLOYMENT WHEN DETERMINING ANY OVERTIME DUE • HORIZONTAL JOINT EMPLOYMENT • EMPLOYEE HAS EMPLOYMENT RELATIONSHIP WITH 2 OR MORE EMPLOYERS. • EMPLOYERS ARE RELATED WITH RESPECT TO THE EMPLOYEE • VERTICAL JOINT EMPLOYMENT • EMPLOYEE HAS EMPLOYMENT RELATIONSHIP WITH 1 EMPLOYER. • DEPENDENT ON ANOTHER EMPLOYER FOR WORK • I. E. TEMPORARY AGENCY WORKERS 16

EMPLOYEES (CONT. ) STATE WAGE HOURS LAWS • STATE INCOME TAX WITHHOLDING LAWS • STATE UNEMPLOYMENT INSURANCE LAWS • ABC TEST • DETERMINES INDEPENDENT CONTRACTOR STATUS FOR OVER ½ OF THE STATES • ABSENCE OF CONTROL • BUSINESS IS UNUSUAL AND/OR AWAY • CUSTOMARILY INDEPENDENT CONTRACTOR • STATE DISABILITY INSURANCE LAWS 17

EMPLOYEES (CONT. ) PROOF OF RIGHT TO WORK IN U. S. • FORM I-9 • EMPLOYMENT ELIGIBILITY VERIFICATION • NEW EMPLOYEES COMPLETE ON DATE OF HIRE OR WHEN ACCEPTING POSITION • FORM I-151 (GREEN CARDS) NO LONGER VALID PROOF OF IMMIGRANT STATUS, IDENTITY OR EMPLOYMENT ELIGIBILITY • RECORD RETENTION: AT LEAST 3 YEARS FROM DATE OF HIRE OR 1 YEAR FROM DATE OF TERMINATION WHICHEVER IS LATER 18

EMPLOYEES (CONT. ) EMPLOYMENT ELIGIBILITY VERIFICATION • REQUIRED DOCUMENTATION • DOCUMENT FROM LIST A OR ONE EACH FROM LIST B AND LIST C • LIST A • PROVES IDENTITY AND WORK AUTHORIZATION • LIST B • PROVES IDENTITY ONLY • LIST C • PROVES WORK AUTHORIZATION ONLY • EXPIRED DOCUMENTS ARE NOT ACCEPTABLE FROM ANY LIST 19

EMPLOYEES (CONT. ) E-VERIFY • VERIFICATION AGAINST SOCIAL SECURITY ADMINISTRATION (SSA) AND DEPARTMENT OF HOMELAND SECURITY (DHS) DATABASES • PROGRAM IS VOLUNTARY AND FREE • FEDERAL CONTRACTORS: REQUIRED TO USE • ON-LINE ENROLLMENT • RIDE (RECORDS & INFORMATION FROM DMV FOR E-VERIFY) • VALIDATES DRIVER’S LICENSE AUTHENTICITY, DRIVER PERMITS, AND STATE ID CARDS • MATCHES DATES OF BIRTH AND DRIVER’S LICENSE IN STATE DMV RECORDS 20

EMPLOYEES (CONT. ) NEW HIRE REPORTING • PERSONAL RESPONSIBILITY AND WORK OPPORTUNITY RECONCILIATION ACT OF 1996 • EMPLOYER MUST PROVIDE THE FOLLOWING INFORMATION: • EMPLOYEE’S NAME, ADDRESS, AND SOCIAL SECURITY NUMBER • DATE THE EMPLOYEE FIRST PERFORMED SERVICE FOR PAY (DATE OF HIRE) • EMPLOYER’S NAME, ADDRESS AND FEDERAL EIN • REPORT DUE WITHIN 20 CALENDAR DAYS OF HIRE • FEDERAL NEW HIRE REPORTING REQUIREMENT • SEVERAL STATES HAVE EXPANDED THEIR NEW HIRE REPORTING REQUIREMENTS TO INCLUDE REPORTING OF INDEPENDENT CONTRACTORS. SEE SECTION 1. 9 • “NEWLY HIRED” INCLUDES AN EMPLOYEE WHO WAS PREVIOUSLY EMPLOYED BY THE EMPLOYER BUT HAS BEEN SEPARATED FROM PRIOR EMPLOYMENT FOR AT LEAST 60 CONSECUTIVE DAYS 21

WORKER MISCLASSIFICATION • IRS PENALTIES • UNINTENTIONAL MISCLASSIFICATION • NO FEDERAL INCOME TAX WITHHELD = 1. 5% OF WAGES PAID • NO INFORMATIONAL RETURN FILED = 3% OF WAGES PAID • NO SOCIAL SECURITY OR MEDICARE TAX WITHHELD = 20% OF EMPLOYEE’S PORTION • NO INFORMATIONAL RETURN FILED = 40% OF EMPLOYEE’S PORTION • INTENTIONAL MISCLASSIFICATION • FEDERAL INCOME TAX WITHHELD = FULL AMOUNT DUE • SOCIAL SECURITY AND MEDICARE TAXES = 100% OF EMPLOYEE + EMPLOYER PORTION • ADDITIONAL PENALTIES FOR NOT FILING INFORMATION RETURNS • STATE AND LOCAL PENALTIES ALSO APPLY 22

CLASSIFICATION SETTLEMENT PROGRAMS • A/K/A CSP • AUDIT ONGOING • 25% ASSESSMENT OF EMPLOYMENT TAX LIABILITY • BUSINESS AGREES TO TREAT WORKER AS AN EMPLOYEE GOING FORWARD • VOLUNTARY SETTLEMENT (VCSP) • AVAILABLE WHEN EMPLOYER IS NOT UNDER AUDIT • OPTIONAL • ALLOWS RECLASSIFICATION WITH LIMITED TAX LIABILITY • RECLASSIFICATION CAUSE RETROACTIVE BENEFITS • CAN CAUSE ADDITIONAL TAX LIABILITY ON STATE / LOCAL JURISDICTIONS 23

DO YOU KNOW? ? ? • 4 CATEGORIES OF STATUTORY EMPLOYEES? • 2 CATEGORIES OF STATUTORY NONEMPLOYEES? • 3 PARTS OF THE ABC TEST? • FORM I-9 USES? • WHEN MUST EMPLOYERS REPORT NEWLY HIRED EMPLOYEES UNDER THE FEDERAL NEW HIRE REPORTING REQUIREMENTS? • FORM USED TO REQUEST EMPLOYMENT STATUS ON A WORKER? • FORM USED TO REPORT WAGES TO AN INDEPENDENT CONTRACTOR AFTER THE END OF THE YEAR? 24