Today’s article is the fourth in a four part series addressing the dire consequences of the IRS worker reclassification program. It is a complicated article because the risks are so great. Please carefully consider it if it applies to you. I’ll try to make future articles WAY more interesting.
Anyway, the Internal Revenue Service is actively pursuing worker reclassification audits so to change the tax treatment of independent contractors to that of employees. In doing so, it is retroactively subjecting employers to significant federal payroll tax liabilities, including penalties and interest. Further, it is subjecting the employer to numerous other federal and state laws which also can be overwhelmingly expensive and time-consuming.
Today we are going to address the potential liability of an employer for the acts of a reclassified worker:
- Worker Reclassification Audit
When the IRS conducts a worker reclassification audit, it looks at all of the facts of your business relationship with each worker. It then applies a 20 factor test to determine whether each worker should be reclassified to be an employee. It can then share that reclassification analysis with various state agencies.
The reverse is true as well. When audits are conducted by the state, those results can be shared with the IRS. Since the IRS believes the test of employee or independent contractor status is the same under both federal and state law, the IRS may not even conduct an audit at all and instead simply accept the state audit as its own. I have those cases right now and they can involve millions of dollars.
- Employer liability
The common law provides that an employer can be made liable for the negligent conduct of an employee so long as the employee was acting within the scope of their employment and was not willful or intentional.
The common law also provides that an employer is not typically liable for the acts of an independent contractor, who is considered to be self-employed and responsible for his or her own actions.
When the IRS conducts an audit and reclassifies an independent contractor to be an employee, that reclassification can become a significant factor in determining whether or not the employer is liable for any acts of that worker.
Nothing can destroy a business faster than a successful work related lawsuit by or because of an employee. El Paso juries are famous for large awards to injured workers which often times are reduced on appeal. How do we protect ourselves ?
- No Insurance
Businesses can simply ignore the problem and assume substantial risks. The scope of their liability can be very broad, the amount they can be sued for is basically unlimited, and many common law defenses may not be available. For example, if an employee was negligent the employer cannot use the comparative negligence of the employee as a defense to reduce the scope of its liability. Not much protection here.
- State Workers Compensation
One of the ways to protect against such a risk is for an employer to buy insurance. The most common form is Workers Compensation, which is a state regulated insurance program that can pay medical bills and some lost wages.
Under this plan, participating employers typically cannot be sued by an injured employee (except where gross negligence by the employer caused a worker fatality and even that is limited). Employees are provided coverage for medical bills and lost wages by the state insurance program. Employers simply are not a participant in these proceedings (no need for an attorney) which are between the employee and the state. This is the exclusive remedy for the employee.
- Private Insurance
Employers can also buy private insurance . This is typically cheaper but there is a deductible, the employer can still be sued, and there’s always the question of whether the insurance company will cover the injury (or force an unacceptable settlement upon the employer by limiting benefits, coverage, etc.) . There are a variety of ways to self-insure and/ or to purchase group insurance through a co-op type arrangement. You really need a good insurance representative if you go this route.
- PEO (professional employer organization)
One of the best ways to buy insurance is through a PEO, professional employer organization. Since that organization is considered a co-employer, then it’s Worker Compensation rate can be used – often times at a substantial reduction over that of the employer. That is something to consider.
So folks, here’s the deal. Employers are responsible for the negligent acts of their employees. If the IRS or State reclassifies your workers from independent contractors to employee status, then you can be liable for their acts as well. You can reduce this risk by preparing for an IRS reclassification audit now and by purchasing insurance to protect yourself.
Again, I promise that my future articles will be more interesting – but this topic is a critical issue for many businesses now.