Worker Classification

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Is an individual service provider an employee or an independent contractor?  As our employee benefits colleagues have noted previously in Covington’s Inside Compensation blog, the IRS test is complicated and just one of many for determining worker status under federal and state laws.  The American Workers, Families, and Employers Assistance Act (the “Bill”), one of a series of COVID-19 relief bills released by Senate Republicans, would address one aspect of worker classification during the COVID-19 pandemic.  Specifically, Section 214 of the Bill would provide that certain COVID-19 related benefits provided to an individual would not be taken into account in determining worker classification under the Code.  Section 214 further provides that such benefits (other than cash payments) would generally be considered qualified disaster relief payments under Code Section 139.…
Continue Reading Senate Bill Would Ignore COVID-19 Assistance in Determining Worker Classification; Treat Certain Benefits as Qualified Disaster Relief Payments

Recently enacted California Assembly Bill 5 (“AB-5”) is a game changer for businesses that use independent contractors in California — and a warning shot for employers nationwide.  Subject to exemptions for certain occupations and professions, AB-5 imposes a strict “ABC” test that appears to put a thumb on the scale of classifying workers as employees rather than independent contractors.

The ABC test was adopted last year by the California Supreme Court in its Dynamex decision to determine classification of workers for purposes of the state’s Industrial Welfare Commission Wage Orders.  For 20 years before Dynamex, worker classification was governed by the more relaxed “Borello” multi-factor test, which focuses on the hiring entity’s right to control an individual’s work and other secondary factors.  AB-5 now makes the ABC test the default standard for determining worker classification — not just under the Wage Orders, but also for all California Labor Code, unemployment insurance, and workers’ compensation claims.…
Continue Reading Hiring Employees vs. Independent Contractors: Navigating Classification Issues in a Drastically Altered California Legislative Landscape

On March 5, 2019, the U.S. District Court for the District of Maryland determined that an employee was potentially entitled to relief under section 7434(a) of the Internal Revenue Code when an employer purposefully reports a portion of their wages on Form 1099-MISC as income from self-employment rather than on the Form W-2.  In Greenwald v. Regency Mgmt. Svcs., LLC, a memorandum opinion, the court allowed the case to proceed to discovery based on the plaintiffs allegations.

The plaintiffs in the case are former employees who were employed as commissioned sales associates.  The plaintiffs did not allege that any hourly wages were reported or withheld upon improperly during the course of their employment, but instead alleged that the defendants failed to withhold on and reported post-termination commission payments on Forms 1099-MISC rather than Forms W-2, forcing the plaintiffs to pay SECA tax.  The plaintiffs alleged that willfully reporting the post-termination commission payments on Form 1099-MISC entitled them to damages under section 7434(a), as well as other claims under state law.

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Continue Reading Federal Court Allows Claim to Proceed Against Employer for Fraudulent W-2s

Yesterday, Treasury and the IRS released final and temporary regulations under Section 7701 meant to clarify issues related to the employment of owners of disregarded entities.  In 2009, the IRS issues regulations that required disregarded entities be treated as a corporation for purposes of employment taxes including federal income tax withholding and Federal Insurance Contribution…