I am always skeptical when I hear a deal that sounds too good to be true.  Because of my healthy skepticism, I hope that I am unlikely to be scammed by the phishing e-mail advising me a foreign distant relative has left me a lot of money and I only need to send a few thousand dollars to an off-shore bank to release the funds (however I also probably won’t return the phone call when I really win a legitimate lottery).  This was my thought when I read about the new IRS Voluntary Classification Settlement Program that lets companies that have misclassified employees as independent contractors to prospectively reclassify the workers as employees and only pay ten percent of the prior year’s payroll taxes –with no penalties or interest.

This sounds like a pretty good deal.  Come clean and fix prior mistakes all while paying a fraction of the back taxes and no interest and penalties and a promise that the IRS won’t audit prior financial years on this topic.  Some of you are probably saying "where do I sign up?"  (Of course, none of you have misclassified any employees as independent contractors.)

One downside to the IRS’s program is while the government is showing some leniency by providing companies with a limited safe harbor to remedy prior mistakes, wage and hour plaintiff’ lawyers are unlikely to be so forgiving.  Participation in the IRS program will be tantamount to admitting that the workers were misclassified as independent contractors and all the baggage that goes along with such a misclassification

Since companies rarely keep records of the hours worked by independent contractors, the newly classified employees can seek several years of unpaid overtime and the employer is unlikely to have any records to rebut the employees’ claims of hours worked.  Moreover, to the extent companies have benefit or incentive plans in which employees participate (but independent contractors do not), companies may face claims for benefits or other incentives (bonuses, options, stock etc.) that were not provided to the misclassified contractors.

The IRS program is an interesting opportunity for companies with misclassified independent contractors to reclassify their workers with less downside to the company.  However, the program could have been more palatable (thereby likely getting better participation) had the IRS included such protections for companies from the other negative consequences that come along from a misclassification of employees as independent contractors such as providing immunity from overtime, benefit or incentive claims for the period of misclassification or providing that agreements with the IRS shall not be admissible in any proceeding involving the company.  Companies will need to weigh all of the benefits and consequences in deciding whether to participate in the Voluntary Classification Settlement Program.

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