In a recent article, the New York Times reported that the Obama Administration (and some states) are starting to actively challenge the classification of employees as independent contractors. Apparently, government officials believe that many companies are wrongfully classifying employees as independent contractors when they have the attributes of common law employees. For example, the workers may have assigned offices, specified hours of work, supervision of the work activities, and so on. In addition, the company may provide the tools (for example, the computers) used by the workers in their jobs.

While the obvious issue is the payment of Social Security, Medicare and unemployment insurance taxes, the reclassification of workers as employees also presents a number of employee benefits issues. Not the least of those are participation in qualified retirement plans (like 401(k) plans) and the opportunity to participate in the health, life and disability insurance programs.

As a result, this is a good time for companies to closely review their employment practices and to make sure that their workers are properly classified.

If a company is audited for employment taxes, and it is determined that some of the independent contractors are actually common law employees, the IRS agents will undoubtedly also refer the matter to the Employee Plans Examination Division. That referral could result in substantial penalties and other costs to the companies that sponsor those plans. Forewarned is forearmed.

If independent contractors are reclassified as employees, the first step in the analysis of the impact on the benefits plans is to review the eligibility and participation provisions of these plans. A well-drafted plan will have language which protects the employer. Unfortunately, most “form” (or “pre-approved”) documents do not have that protective language.

If you have any questions about these issues, please contact our ERISA attorneys and employment lawyers.

Source: The New York Times