The HR Legal News Blog

Self-Help for Employers with Worker Misclassification Issues

Employers often struggle with the question of whether an individual worker is an employee or an independent contractor.  This issue is sometimes brought to the employer’s attention by the Department of Labor or Internal Revenue Service.  There are, however, many instances in which the employer becomes aware that a worker has been misclassified as an independent contractor and really should be treated as an employee.

Under the Internal Revenue Service’s Voluntary Classification Settlement Program (VCSP), an eligible employer may voluntarily reclassify workers as employees and agree to comply with requirements for withholding federal income tax and making appropriate contributions under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) during future tax periods.  In addition, the employer must pay ten percent of the employment tax liability that would have been due on the compensation paid to the reclassified workers during the most recent tax year if they had been properly classified as employees.  In exchange, the employer is relieved of liability for interest and penalties and will not be subject to an employment tax audit for prior years.

In order to be eligible for the VCSP, an employer must:

  • have consistently treated the worker as a non-employee;
  • have filed Form 1099 for each reclassified worker for the preceding three calendar years or, if less, the period of time the worker has performed services for the employer;
  • not be subject to any current examination by the IRS, Department of Labor or a state agency regarding the proper classification of the workers;
  • either (i) not have been previously examined by the IRS or Department of Labor regarding the proper classification of the workers or (ii) have complied with the results of any prior examination.

 

Employers who submit a VCSP application should remember, however, that liability for employment taxes is only one of the consequences of misclassifying an employee.  A person who has been incorrectly classified as an independent contractor may also have rights to participate in employee benefit plans and other perquisites of employment.  Consulting with a lawyer is a prudent first step towards rectifying a misclassification problem.

For more details about the VCSP program, see Form 8952 and the related instructions and Announcement 2012-45.