Social Security Tax Exemption

The HIRE Act includes an exemption of 6.2-percent of Old Age, Survivors and Disability Insurance (OASDI) taxes—in other words the Social Security component of FICA taxes.  This exemption applies to wages paid after March 18, 2010 (the day of enactment of the HIRE Act).  The employer must must apply the exemption on the return for the quarter in which they paid the related wages.

What is a Qualified Employer?

A qualified employer is any non-governmental U.S. entity.   Federal, state, or local governments or instrumentalities (except for state colleges and universities) do not qualify.  Any employer may choose to opt-out of the forgiveness program.

What is a Qualified Employee?

Any previously unemployed individual, hired between February 3, 2010 and January 1, 2011, is a qualified employee.  For purposes of the HIRE Act, “unemployed” means that the individual has worked no more than 40 hours employment in the 60 days before hiring.  To be a qualified employee, the individual must certify by a signed affidavit, under penalty of perjury, that he or she has not been employed for more than 40 hours during the 60-day period ending on the date they started employment. The IRS issued Form W-11, the HIRE Act Employee Affidavit, for this purpose.  Qualified employees include neither individuals that replace existing employees (unless that employee’s departure was either voluntarily or for cause) nor family members or others that are closely related to the employer or owners of the business.

How Do I Claim the Exemption?

The IRS recently released the forms necessary for employers to claim the special payroll tax exemption provided by the Act. To claim the payroll exemption, employers must do so on Form 941, the Employer’s Quarterly Federal Tax Return, which the IRS recently revised.  The employer need not submit Form W-11 to the IRS, but must maintain a record of the signed affidavit along with other tax records.

Retained Worker Tax Credit

In addition to the tax exemption, employers may also be eligible for an additional tax credit equal to the lesser of $1,000 or 6.2% of the wages paid by the employer to the new employee.

What is a Qualified Retained Worker?

A retained worker is a qualified employee for purposes of the payroll tax exemption (i.e., a previously unemployed individual, hired between February 3, 2010 and January 1, 2011) who remains an employee for at least 52 consecutive weeks.  To ensure just pay, that worker must earn in the last 26 weeks of employment an amount equal to at least 80 percent of his or her wages for the first 26 weeks of employment.

Employers are able to claim the retained worker credit only if the full 52-week period is met. Should a worker spend 51 consecutive weeks in employment and then leave, the employer would not be eligible for any portion of the tax credit.

How Do I Claim the Credit?

An employer may claim the new hire retention credit for qualified employees on its 2010 income tax return.

Conclusion

This short summary is by no means a comprehensive review of the new law. Look for more details in the months ahead about how these and other provisions of the HIRE Act may provide you and your business with considerable opportunities to maximize tax savings, or contact us at The AR Group for assistance.

(1) Display a poster in the workplace that provides notice to employees of their right to form, join, and assist unions; to bargain collectively with their employers with or without the support of a union; and the option to refrain from all such endeavors.

(2) Include in every covered federal contract a clause requiring subcontractors to comply with the notice display requirements.

Though the final rule lists the rights of employees to unionize and collectively bargain with employers, it also details five examples of unlawful union conduct, including threats by a union that it will have a worker fired if he or she does not support the union.

Notably, although this EO rescinded the Beck poster requirement, the final rule does not appear to require removal of Beck posters currently displayed.

What Must You Do to Comply?

The deadline for compliance with the rule and displaying the required poster for covered contracts is June 21, 2010.

Covered contracts are those prime contracts that are issued or modified on or after June 21, 2010 and whose value meets or exceeds the simplified acquisition threshold (currently $100,000). But subcontracts are also covered so long as the value of the subcontract exceeds $10,000. In other words, even if the prime contract is under the simplified acquisition threshold, a subcontract that exceeds $10,000 and is necessary to the performance of the prime contract is subject to the posting requirement.

The notice must be posted only where employees covered by the NLRA perform contract-related activities. To determine whether employees at a specific site perform “contract-related activities,” one must assess whether the duties of any employee’s position include work that contributes to or furthers the performance of the contract, or work whose omission would impede the contract’s performance. For example, if a contractor has two facilities, one of which involves employees whose work does not contribute to or further the performance of the contract, but the other facility has employees whose work contributes to or furthers the performance of the contract, the poster need only be displayed at the latter facility. If the cost of a given employee is not allocable as a direct cost to the contract or is indirectly allocable as less than 2% to the cost of the contract, then that employee is not considered to be engaged in performing the work of the contract.

The poster must be displayed “conspicuously.”  That means that the notice must be posted in all places where employee announcements are typically placed.  It must be displayed prominently and be readily observable. In addition, if employee notices are customarily posted electronically, whether on external or internal websites, contractors must electronically post the notice. The rule provides specific instructions for complying with the electronic posting requirement. Further, if a significant number of employees are not literate in English, contractors must post the notice in languages in which the employees are literate. The rule contemplates that the poster will be available from the OLMS web-site in languages other than English, but at the time of this posting, translated versions of the poster were not available.

Enforcement

The Office of Federal Contract Compliance Programs (OFCCP) is charged with conducting audits to assure contractor compliance.  These audits may or may not be done in conjunction with other compliance reviews (such as under EO 11246, which requires compliance with EEO requirements). Contractors found in violation of this regulation will be asked to correct the offense through conciliation. In extreme cases, employers may be subject to sanctions, including suspension of their contract until they are in compliance, or may even face debarment.

Though this Interpretation only directly applies to banks and other lenders, who will need to revise their pay practices for mortgage loan officers, employers in other industries should also take note because the reversal and the manner in which it was issued signals a fundamental shift in how the agency will work with employers seeking assistance with classification.  First, the substance of the Interpretation highlights the Department’s willingness to re-evaluate its approach to exemption classifications.  And second, as noted in a prior blog post, it reveals that the Department, going forward, will not respond to specific inquiries lodged by employers.

Banks and lenders should take note that the March 24th Interpretation did not address a prior, but apparently still valid, Administrator opinion finding that the “outside sales exemption” (as opposed to the administrative exemption) may apply to certain mortgage loan employees.  Thus, banks and lenders are encouraged to consider applying that analysis to the positions in question as it would appear that at least some will fall under that exemption.

Although the views of the DOL are often cited by the courts as being persuasive, those views are not technically binding on the courts, so it remains to be seen how much deference the courts will afford the DOL’s new position.  What is clear, is that the DOL’s 2006 opinion no longer provides a safe harbor for classifying mortgage loan officers as exempt from the pay requirements of FLSA.  Employers of who previously classified mortgage loan officers as exempt should re-evaluate the classifications in light of the “outside sales” exemption or revise their pay practices for these employees.

In a March 24th release, the Wage and Hour Division explained that it will no longer provide situation-specific Opinion Letters in response to employer inquiries.  Instead, the Division will periodically release “Administrator’s Interpretations” on issues or concerns that it believes requires addressing.  Unlike Opinion Letters, the Interpretations will “set forth a general interpretation of the law and regulations, applicable across-the-board to all those affected by the provision at issue.”  Employers with specific questions, therefore, will be referred to statutes and regulations for guidance.

While technically under 29 U.S.C. § 259, the new Interpretations qualify for the absolute “good faith defense,” it will now be harder for employers to plausibly assert such a defense.  This is because Administrator Interpretations will not rely on particularized facts submitted by an employer concerning a given position but will be based upon the Division’s generalized assumptions concerning the duties of a given position.  Since exemptions to the FLSA’s overtime and minimum wage requirements depend on an employee’s “actual job duties,” reliance on a generalized Administrator Interpretation may not be appropriate let alone defensible.

Also problematic for employers is that whereas in the past employers could reasonably and reliably turn to the DOL for timely guidance on pressing classification issue through an Opinion Letter request, now the Division will release Administrator Interpretations at its discretion, when it determines that clarification may be needed.

Notably, employers may still rely on previously-issued Opinion Letters in their compliance efforts, so long as these opinions are not superseded by new authority. The new Administrator’s Interpretations, however, provide guidance that is considerably less clear.

In all cases involving compliance with the FLSA and other employment statutes, it is worth consulting counsel when in doubt.

Notice Content

The CHIP Notice conveys to employees basic information about premium assistance programs through Medicaid or state Children’s Health Insurance Programs in certain specific states. The Notice is intended to provide information about the availability of premium assistance, a Health Insurance Portability and Accountability Act (HIPAA) special enrollment right that may be triggered by eligibility for premium assistance, and a list of contact information for specific state Medicaid and CHIP agencies, current as of February 2010. The EBSA intends to update the model notice annually so as to keep the contact information accurate. See the DOL’s Model Notice.

Effective Dates

The CHIP Notice must be provided by: (1) May 1, 2010 for plan years that begin between February 4, 2010 and May 1, 2010; or (2) the first day of the plan year for any plan year starting after May 1, 2010 (January 1, 2011 for calendar year plans).

Distribution and Timing Requirements

The Notice must be sent to all employees who reside in states that offer premium assistance programs through Medicaid or CHIP, regardless of their enrollment status. An employer is subject to the notice requirement if it provides medical coverage to employees who reside in such states, without regard to the employer’s location. The Notice must be provided automatically and free of charge on an annual basis. The Notice may be distributed with annual enrollment and new hire packages ahead of the effective date.

An effective worker classification analysis should begin with answering the following two threshold type questions:

• Does the company pay one or more employees to perform essentially the same duties as the subject worker who is treated as an independent contractor?
• Has the subject worker previously been paid by the company as an employee to perform essentially the same task?

If the answer to either of these questions is yes, the worker most likely will be deemed an employee for classification purposes.

Beyond these threshold questions, fundamentally, the IRS will allow independent contractor classifications only when the company hiring the contractor can show that it lacks the necessary control over the worker that otherwise would indicate an employer-employee relationship.  As part of the audit, therefore, the IRS will consider the following 20 factors in order to determine whether the company has “control” over the worker or workers in question:

1. Instructions. A worker who is required to comply with another person’s instructions re: when, where, and how to perform work is likely an employee.
2. Training. Training a worker indicates that the company wants the services performed in a particular method or manner, which indicates control.
3. Integration. Integration of the worker’s services into the company’s core business operations suggests that the worker is subject to direction/control.
4. Services Rendered Personally.  Where a worker must personally perform services for the company, control by the company is indicated. Alternatively, if a worker is free to engage others to perform the service for the company (i.e., subcontractors), lack of control is indicated.
5. Hiring, Supervising and Paying Assistants. If the worker is unable to hire, supervise, and pay assistants to perform services for the company in the worker’s stead, control is indicated. By contrast, a lack of control is indicated when the worker is able to hire his/her own assistants and pay them from his/her own funds.
6. Continuing Relationship. A lengthy and continuous relationship between the worker and company suggests an employment relationship.
7. Set Hours of Work. If the worker works certain hours set by the company, employment status is indicated. Where hours are not controlled or set by the company, independent contractor status is indicated.
8. Full Time Required. If the worker must devote substantially full-time to the company’s business, control is indicated.
9. Work Performed on Employer’s Premises. If the work is performed on the company’s premises, the company is considered to have control, especially if the work could be done elsewhere. Control is also indicated when the company has the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places.
10. Order or Sequence Set. If a worker must perform services in the order or sequence as determined by the company, the worker is generally subject to an employer’s control. But if the worker chooses his/her own method for completing a job, a lack of control exists.
11. Oral or Written Reports. A requirement that a worker submit regular or written reports is an indicator of control.
12. Payment by Hour, Week, Month. Hourly, weekly or monthly payments generally point to an employment relationship. On the other hand, payments based on a contract or for completing a particular job or task will generally indicate an independent contractor relationship.
13. Payment of Business and/or Traveling Expenses. If the company ordinarily pays the worker’s business and traveling expenses, the worker is ordinarily an employee.
14. Furnishing of Tools and Materials. If the company furnishes significant tools, materials, or other equipment, an employment relationship is indicated.
15. Significant Investment. If the worker does not invest in his/her own facilities, control is indicated because the worker depends on the company.
16. Realization of Profit or Loss. A worker who cannot realize a profit beyond an ordinary salary or suffer a loss is generally considered an employee.
17. Working for More Than One Firm at a Time. If the worker cannot perform services for more than one company at a time, the company generally controls the worker. A lack of control, however, is indicated when the worker is allowed to perform services for multiple companies simultaneously.
18. Making Service Available to General Public. If a worker is not free to advertise his or her services to the general public on a regular basis, control is indicated. Workers who advertise their services are generally considered independent contractors.
19. Right to Discharge. The right of the company to discharge a worker without breaching a contract indicates an employment relationship as control is exercised through the threat of dismissal.
20. Right to Terminate. If the worker has the right to end his or her relationship with the company at any time without incurring liability, an employment relationship is indicated.

See Rev. Rul. 87-41;  see also IRS Form SS-8. None of these factors are singularly determinative. Instead, all factors should be considered in making an accurate determination.

It is important to understand that the various state revenue and labor departments are also concerned with worker misclassification and have been increasing enforcement over classification at varying speeds. The worker classification analysis used by many states will differ substantially from the 20-factor test used by the IRS.  This means that different classifications can result based on the same facts.  Accordingly, the IRS could, for example, determine that a worker is rightfully classified as an employee when another agency could determine that that same employee should be classified as an independent consultant.

If your company uses independent contractors and you have classification questions after reviewing this 20-factor test, either at the federal or state level, please contact The AR Group at info@theARgroup.com or 720-283-1021.  We specialize in conducting attorney-client-protected audits and devising corrective strategies.

The 180 notices of inspection result from a relatively new enforcement strategy designed to focus on auditing and investigating employer compliance practices. Issuance of these notices evidences the agency’s commitment to establishing a meaningful I-9 inspection program to promote compliance with the law.

Employers should be mindful that raids by immigration officials and criminal prosecution can ensue if the government discerns or finds I-9 violations. The best strategy to mitigate the risk of inspection and the potential application of criminal or economic sanctions is to manage your I-9 files through proactive employee file management and review, and the implementation of other processes to comply with ICE’s regulations. HR COMPLIANCE SOLUTIONS is here to assist with I-9 audit, employee file reviews and overall compliance management.