Procedure & Administration
On September 19, 2011, the secretary of Labor and the IRS commissioner signed a memorandum of understanding (MOU) agreeing to enable the Department of Labor (DOL) to share information and coordinate law enforcement with the IRS “to end the business practice of misclassifying employees in order to avoid providing employment protections.” In addition, state labor commissioners and other agency leaders representing seven states signed MOUs to share data with the DOL (Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington), and four more agreed to enter into an MOU (Hawaii, Illinois, Montana, and New York).
Two days later, the IRS announced its Voluntary Classification Settlement Program (VCSP), allowing employers to voluntarily reclassify their workers from independent contractors to employees under certain circumstances, with terms more favorable than if the issue is resolved after an audit.
Labor Secretary Hilda Solis said in a news release that the purpose of the MOUs is to “send a coordinated message: We’re standing united to end the practice of misclassifying employees, [and w]e are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike” (Labor Dep’t Wage and Hour Division news release 11-1373-NAT (9/19/11)).
Under its MOU with the IRS, DOL will refer for investigation “information and other data that DOL believes may raise Internal Revenue employment tax compliance issues related to misclassification.” The IRS will evaluate the referrals and “conduct examinations to determine compliance with employment tax laws.” The IRS also will share the referrals with state and municipal taxing authorities.
Implications
The IRS and 37 states have existing data-sharing MOUs as part of the Questionable Employment Tax Practices (QETP) program. States participating in the QETP send information to the IRS when they reclassify workers; the QETP states also receive information from the IRS about federal employment tax misclassification audits of employers in their states. The IRS–DOL MOU could expand the information going to the states to include DOL referrals. The IRS–DOL MOU specifically allows the IRS to share DOL referrals with states that already have approved agreements to share data.
A number of states recently have also adopted mutual MOUs agreeing to share worker reclassification information for unemployment, workers’ compensation, income tax, and wage-hour law enforcement purposes. If these states also have MOUs with the IRS and/or DOL, employers in those states have a much greater chance of facing a broad spectrum of consequences for worker reclassification audit findings.
The enforcement initiative represents a step toward increased cooperation among federal agencies and states to improve their efficiency and ability to assess risk, allowing them to target specific enforcement resources to employment tax compliance. The issue of worker classification has already been identified as one of four areas specifically targeted as a part of the IRS’s national research program (NRP) related to employment tax compliance. The data received by the DOL, which may ultimately be shared with the states, could significantly increase employment tax audits related to worker classification.
In light of the MOUs, VCSP, and other developments, employers should assess their risk related to this issue and determine an appropriate approach based on their facts and circumstances.
EditorNotes
Michael Dell is a partner at Ernst & Young LLP in Washington, DC.
For additional information about these items, contact Mr. Dell at (202) 327-8788 or michael.dell@ey.com.
Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.
