1. Worker Misclassification Worker Misclassification August 14 th and 16 th, 2012

2. 2 Worker Misclassification Welcome to Workforce 3 One! Welcome to Workforce 3 One!

3. 3 Worker Misclassification Submitting Questions: Open Chat Drop-Down Menu  To submit a question, type the question in the text field and press your Enter/Return key. ‒ Please enter the name to whom the question is directed.  To send questions only to the presenters, select Presenters from the drop-down menu before pressing your Enter/Return key.  Change Text Size and Chat Color… Text Field

4. 4 Worker Misclassification Practice In the Chat Room, please type the name of your organization, your location, and how many people are attending with you today.

5. 5 Worker Misclassification Access to Webinar Resources WEBINAR RESOURCES: Recordings and transcripts are available within 2 business days after the event.

6. 6 Worker Misclassification Presenter Tom Crowley Moderator Moderator

7. 7 Worker Misclassification QETP & SUTA Dumping Webinar Information  UI CoP – http://ui.workforce3one.orghttp://ui.workforce3one.org  QETP - May 22 – https://www.workforce3one.org/view/50012074510 82619286/info https://www.workforce3one.org/view/50012074510 82619286/info  QETP - May 23 – https://www.workforce3one.org/view/50012074514 10201436/info https://www.workforce3one.org/view/50012074514 10201436/info  SUTA Dumping – June 19 – https://www.workforce3one.org/ws/www/Folders/3 001217746518850542/webinar.htm https://www.workforce3one.org/ws/www/Folders/3 001217746518850542/webinar.htm

8. 8 Worker Misclassification Presenters  Tom Crowley, UI Tax Chief, Crowley.thomas@dol.gov Crowley.thomas@dol.gov Phone: 202-693-3203  Ann Lichter, USDOL, Wage & Hour Div. Senior Program Advisor, Lichter.Ann@dol.gov Phone: 202-693-0051  Dennis Morton, State of Maryland Director, Contributions Division dmorton@dllr.state.md.us dmorton@dllr.state.md.us Phone: 410-767-2488

9. 9 Worker Misclassification  Frame the issue – Discuss classification for FUTA and state UI  Summarize national audit performance  Ann Lichter of USDOL Wage and Hour discusses the new initiative to collaborate with state worker protection agencies  Dennis Morton, the Maryland Director of the Contributions Division will discuss how Maryland has managed their audit program to meet and pass the Effective Audit MeasureAgenda/Objectives

10. 10 Worker Misclassification What is an Employee?  Federal Unemployment Insurance (FUTA) ‒ Common Law ‒ IRS uses 20 Factors Test; which evolved into ‒ 3 Tests Behavioral Control; Financial Control; and Relationship of the Worker and the firm

11. 11 Worker Misclassification What is an Employee? FUTA  Behavioral Control - whether the business has a right to direct and control how the worker does the task for which the worker is hired ‒ Instructions that the business gives to the worker ‒ Training that the business gives to the worker

12. 12 Worker Misclassification  Financial Control - Does the business have the right to control the business aspects of the worker’s job? ‒ Does the worker risk profit/loss? ‒ Unreimbursed business expenses ‒ Is the worker free to market his/her services? ‒ How is the worker paid? What is an Employee? FUTA

13. 13 Worker Misclassification  Type of relationship - Do the facts support a worker/employer relationship? ‒ Are there written contracts? ‒ Does the worker have employee-type benefits? ‒ Is the relationship time-bound? ‒ Are the services part of the regular business? What is an Employee? FUTA

14. 14 Worker Misclassification Internal Revenue Service (IRS) Section 530 (Safe Harbor)  IRS must operate within the provisions of Section 530  When an employer erroneously classifies employees or a group of employees as independent contractors, the employer will be held harmless for past and future Federal employment tax obligations if he or she relied on: –Past rulings or judicial precedent –Industry practice –Past IRS audit practice –Any other “reasonable” basis  Rule applies to IRS & FUTA, but NOT necessarily to SUTA.  Similar businesses not necessarily required to be treated equally  Prohibits the IRS from publishing regulations and Revenue Rulings with respect to the IC status of an individual for Federal employment taxes or income tax withholding

15. 15 Worker Misclassification Safe Harbor (Continued)  To be construed liberally in favor of taxpayers (employers)  The employer must apply IC status to all similar workers  The employer must not have treated the worker as an employee for any period  Employer must file all Federal tax returns consistent with treating such worker as an IC (form 1099)  Provisions do not apply to employers with unreported workers

16. 16 Worker Misclassification What is an Employee? State UI  ABC Test (next slide)  A and/or B and/or C  IRS rules  Other

17. 17 Worker Misclassification

18. 18 Worker Misclassification Effective Audit Measure  Four Audit Factors combine for Pass / Fail  Each factor must be passed –Penetration rate (1%) –Percentage of total wages audited annually (1%) –Percentage of wages changed by audit (2%) –Average number of misclassifications detected per audit (1/Audit)  And - overall combined score of 7 or more

19. 19 Worker Misclassification Penetration Rate

20. 20 Worker Misclassification Percent Total Wages Audited

21. 21 Worker Misclassification Percent Wages Changed By Audit

22. 22 Worker Misclassification Average Number of Misclassifications Detected Per Audit

23. 23 Worker Misclassification National Audit Summary

24. 24 Worker Misclassification Presenter Ann Lichter USDOL Wage and Hour Division USDOL Wage and Hour Division

25. 25 Worker Misclassification Wage and Hour Division Mission: To promote and achieve compliance with labor standards to protect and enhance the welfare of the nation’s workforce.  Laws administered by WHD cover 7.3 million businesses and 135 million workers  WHD has over 200 offices across the country  More than half of 1000+ investigators are bilingual

26. 26 Worker Misclassification Wage and Hour Division Laws Enforced by WHD  Fair Labor Standards Act  Family and Medical Leave Act  Davis Bacon and Related Acts  Service Contract Act  Migrant & Seasonal Agricultural Work  Wage Garnishment  Temporary Worker Programs

27. 27 Worker Misclassification  FLSA: Employment Relationship –“To suffer or permit to work” –Analysis depends on the “economic realities” of the relationship

28. 28 Worker Misclassification Wage and Hour Division Investigations  Complaint  Directed enforcement  Focus on vulnerable workers & industries with history, prevalence of violations Records  Employee information  Hours worked & payroll (including deductions, basis on which wages are paid)  1099s  Financial records that demonstrate annual dollar volume

29. 29 Worker Misclassification Wage and Hour Division Misclassification Initiative  MOUs with 13 states –CA, WA, UT, MN, MT, MI, CO, LA, MD, MA, CT, HI, IL  State MOU partner agency varies  State MOUs provide for: –Information sharing –Coordinated enforcement See: http://www.dol.gov/whd/workers/Misclassification/index.htmhttp://www.dol.gov/whd/workers/Misclassification/index.htm

30. 30 Worker Misclassification Wage and Hour Division

31. 31 Worker Misclassification Wage and Hour Division

32. 32 Worker Misclassification Presenter Dennis Morton Director, Contributions Division State of Maryland

33. 33 Worker Misclassification Worker Misclassification - Auditing Techniques for Detection & Enforcement Maryland– Division of Unemployment Insurance MDUNEMPLOYMENT.COM August 14, 2012

34. 34 Worker Misclassification

35. 35 Worker Misclassification

36. 36 Worker Misclassification Maryland – ABC State  Authority: MD Labor and Employment Article, LE § 8-205 ( A Three Part Conjunctive Test) –It must be proved that the individual is: A.Free from direction and control; B.Independently established in business; and C.Work is performed in a separate place of business or not in the usual course of business

37. 37 Worker Misclassification Field Audit Staff  Administrators ……………………. 2  Regional Supervisors ……………. 3  Auditor Supervisors …………….. 11  Auditors …………………………….. 35  Support Staff ……………………….. 6  Total …………………………………. 57

38. 38 Worker Misclassification TARGET AUDITS 1099s Construction, Landscaping, Transportation / Drivers, Healthcare / Caregivers Questionnaires completed by claimants who were paid by 1099 Referrals from other units relating to independent contractor issues Correspondence from employers relating to fraud and independent contractor issues 1099s received from IRS that have suspect independent contractor issues Information provided by Labor and Industry, Workman's Comp, and Comptroller’s Office relating to worker misclassification uifieldinvestigation@dllr.state.md.us Target Industry Claimant Questionnaires Referrals from other units TIPS Information Sharing 1099s

39. 39 Worker Misclassification 2012 Target Industries (Based on 2011 Results) 2012 Target Audit List Results2011 NAICSDescriptionCQChange AuditsNew WorkersAudits% Change new wrk/chg adt 236Construction of Buildings477465314949.66%8.8 238Specialty Trade Contractors56113106130237.42%9.4 492Couriers & Messengers124202580.00%50.5 561612Security Guards & Patrol Services1239473100.00%315.7 561720Janitorial Services14327214965.31%22.5 621210Offices of Dentists105154612839.84%10.7 621610Home Health Care Services26167161984.21%44.8 624Social Assistance29204685040.00%23.4 561320Temporary Help Services147329977.78%47.0 722320Caterers12709728.57%354.5 999999Unclassified23204663655.56%23.3

40. 40 Worker Misclassification Audit Analysis for 2009, 2010, 2011 and YTD *6/30/12 (138,588 Employers 6/30/12) Year Total Employers Audited Total New Workers Discovered Underreported Taxable Wages Underreported Contributions (tax) 2009 2,81010,265$59,227,749.58$906,717.42 2010 2,67510,951$53,376,239.09$1,363,194.04 2011 2,08612,715$58,074,178.09$1,822,504.02 2012 * 9866,558$30,796,296.62$990,274.83 Total 8,55740,490 $201,474,463.38$5,082,690.31

41. 41 Worker Misclassification

42. 42 Worker Misclassification

43. 43 Worker Misclassification Audit Review Determinations for 2009, 2010, 2011 and YTD 8/3/2012 Year Completed Audits Review Determinations Audits Appealed to the Board 2009 28101032 2010 26751074 2011 20861111 2012 * 986703 Total 869138810 YTD * August 3, 2012

44. 44 Worker Misclassification Maryland Dennis Morton, Maryland Director of the Contributions Division Thank you!

45. 45 Worker Misclassification ` UI Community of Practice (UI CoP)

46. 46 Worker Misclassification ` UI Community of Practice (UI CoP)

47. 47 Worker Misclassification ` UI Community of Practice (UI CoP)

48. 48 Worker Misclassification Please enter your questions into the Chat Room! Question and Answer Period

49. 49 Worker Misclassification Share Your Ideas with Your Peers!

50. 50 Worker Misclassification Access to Webinar Resources WEBINAR RESOURCES: Recordings and transcripts are available within 2 business days after the event.

51. 51 Worker Misclassification Stay Informed, Get Connected!

52. 52 Worker Misclassification www.workforce3one.org For more information about the Workforce Investment System:  Visit www.careeronestop.orgwww.careeronestop.org  Call 1-877-US2-JOBS