The Risk of Using Independent Contractors

The authors highlight some of the recent changes which may effect companies who employ independent contractors. State and federal regulators and legislators have taken steps to address the widely used, (and often abused) practice of misclassifying entire classes of employees as independent contractors. The report reveals why large and small employers alike should take care in assigning independent contractor status to individuals engaged in consulting, delivery and transportation, sales and marketing, management, personal and technical services.

Compliance and the fear of litigation is just one of the reasons that so many employers are seeking the services of third party employee management firms. Many service models exist, from payrolling companies - providers who serve contingent workforces, employee leasing companies, and PEO's - Professional Employer Organizations.

Below are excerpts from a recent article in the New York Law Journal.
http://www.nylj.com

By Richard J. Reibstein, John A. Nixon, Dan A. Schulder, Stuart A. Shorenstein and Tiffany Raspberry.

The legal landscape involving independent contractors has dramatically and swiftly changed. For decades, legal challenges to an employer's use of independent contractors were infrequent, and many companies were willing to risk the remote chance that they would have to defend a lawsuit or a regulatory inquiry that they had misclassified certain employees as independent contractors.

Over the last year, however, there has been a wave of regulatory and legislative initiatives at both the federal and state levels seeking to stem the use of independent contractors. In addition, companies have been faced with substantial judgments in highly visible lawsuits brought on behalf of classes of workers who have successfully established that they were common law employees improperly classified by their employers as independent contractors.

Regulatory Initiatives

Within the past year, there have been a number of initiatives regulating the use of independent contractors. In May 2007, the Internal Revenue Service undertook a worker misclassification program and announced that the misuse of independent contractors would be a major area of emphasis for the IRS in fiscal 2008. By Nov. 6, 2007, the IRS had entered into data-sharing agreements with 29 state workforce agencies to share the results of employment tax examinations. The IRS has also started to focus in earnest on large corporate employers that allegedly have misclassified employees as independent contractors. In December 2007, the IRS assessed FedEx Ground for $319 million in unpaid employment taxes and penalties, just for calendar year 2002, following the IRS's determination that FedEx Ground drivers had been misclassified as independent contractors.

The Risks of Misclassification

Some of the most substantial risks faced by employers that are found to have improperly reported the income of employees as independent contractors are liability for unpaid federal, state and local income tax withholdings and liability over Social Security and Medicare contributions that are not paid on a Form 1099. Other large financial risks include unpaid unemployment insurance premiums, unpaid Workers' Compensation premiums and unpaid overtime compensation and work-related expenses. These types of liabilities (plus interest and penalties for non-payment) can be potentially devastating for employers that make considerable use of independent contractors.

Another substantial risk is a claim of benefit entitlement by or on behalf of common law employees misclassified as independent contractors. Claims have been successfully brought for pension and profit-sharing benefits, medical benefits and even stock options.

Reclassification

One way to avoid future liability is to reclassify questionable independent contractors as employees. After determining the identity of the 1099ers, counsel should undertake an individualized assessment as to whether each person or class of persons so identified is legally an independent contractor or actually a common law employee.

The legal test for independent contractor or employee status varies according to the law being enforced. The IRS abandoned its fabled 20-factor test several years ago; its current test is supposedly more simplified, focusing on three principal aspects of the worker's relationship with the business: (1) the degree of behavioral control that the business can exercise over the individual; (2) the degree of financial control that the business can exercise over the individual; and (3) the parties' views and perceptions of the relationship. In the employee benefits arena, the U.S. Supreme Court has stated that the test under ERISA focuses upon the hiring party's "right to control the manner and means by which the product is accomplished."⁴ Although the Supreme Court, the IRS and state agencies have articulated their criteria for determining employee status, the application of these criteria is oftentimes vexing, even to experienced legal practitioners.

Employee Leasing

The use of a responsible employee leasing organization is a practical and viable alternative that allows 1099ers to continue to provide services to the company, yet it substantially minimizes a company's exposure to liability under the tax, employee benefits and labor laws. This alternative can dramatically reduce a company's risk of liability and substantially diminish the likelihood of a lawsuit or an audit by a governmental agency.

Unlike payrolling companies, an employee leasing organization is a third-party employer. Some or all of the company's 1099ers (as well as its long-term temps, project employees, per diems and consultants) can be hired as employees of the leasing organization, which withholds taxes; makes Social Security, Medicare and unemployment payments; pays Workers' Compensation premiums; and may also provide basic medical and dental benefits and offer participation in a 401(k) plan maintained by the leasing organization.

Employers have allowed themselves to be imperiled by such risks because there is a very significant economic inducement to avoid an array of payments required to be made for employees but not for independent contractors. Along with lax enforcement in the past by the IRS and state agencies, these financial incentives have led many businesses to overuse the independent contractor classification.

Conclusion

Now that the IRS and the states have prioritized and targeted employer misuse of independent contractors, companies that use 1099ers to supplement their work force should examine whether they may have legal exposure for employee misclassification. If the potential tax, employee benefits or labor law liability is significant, companies would be wise to seek the most appropriate ways to eliminate or minimize their exposure and comply with laws governing the use of independent contractors. A coordinated, interdisciplinary approach may best serve the company's interests.

There is a significant economic inducement to avoid an array of payments required to be made for employees but not for independent contractors. Along with lax enforcement in the past by the IRS and state agencies, these financial incentives have led many businesses to overuse the independent contractor classification.

The authors are members of WolfBlock's independent contractor compliance working group. Richard J. Reibstein (rreibstein@wolfblock.com) (employment), John A. Nixon (jnixon@wolfblock.com) (employee benefits), Dan A. Schulder (dschulder@wolfblock.com) (tax), and Stuart A. Shorenstein (sshorenstein@wolfblock.com) (government relations) are partners of WolfBlock. Tiffany Raspberry (traspberry@wolfblock.com) is a government relations specialist with WolfBlock Public Strategies.

Direct Deposit Saves Time And Money

A direct deposit is when your employer deposits your paycheck into your bank account rather than handing you a paper check. Direct deposits save employers money and employees time. Employees no longer have to wait for their paycheck to clear the bank before paying bills or making purchases. Paper checks can be lost, torn or stolen. Direct deposits are secure, confidential and require very little paperwork to set up. Direct deposits are routinely offered by Professional Employers Organizations (PEOs) and Employee Leasing Companies. If your employer does not offer direct deposits ask them to consider working with an employee leasing company that offers this benefit.

What Is Employee Leasing?

Employee leasing is when an employer moves employees from his or her payroll onto the payroll of an employee leasing company. The employee leasing company becomes the employer of record for the employees and then "loans" the employees back to the original employer for a fee. This fee includes payroll costs and usually includes benefits. The employee leasing company handles all human resources functions for the employees including but not limited to payroll, legal compliance, record keeping and benefits. Employee leasing firms work with any size company and normally offers an employer a significant cost savings.

PEO Services

What kind of services does a typical Professional Employer Organization (PEO) offer?:

PEO Payroll Administration

* Prepare payroll and distribute checks
* Direct deposit
* W2’s
* W3’s
* Payroll Data
* Withholdings and Tax Deposits
* Payroll record keeping, audits
* I-9 inquiries
* Reports and job costing
* Time clock management
* Vacation
* Payroll software

PEO Workers Compensation

* Claims administration
* OSHA Compliance
* Policy cost
* Dividend plan reviews and audits
* Report and document accidents
* Safety plan creation, administration and training
* Work Comp billing reconciliation
* Safety audits
* NCCI rate reviews

PEO Employee Benefits

* Short term disability
* Long term disability
* Benefits handbook
* Dental insurance
* Health insurance
* Eligibility tracking
* COBRA compliance and administration
* Plan discrimination testing
* Carrier payments and account audits
* Annual plan cost reviews
* 401K administration
* Annual enrollments
* Flexible spending accounts administration
* Section 125 (pretax) premium audits
* Life Insurance plan administration
* Employee assistance plans (EAP) administration

PEO Human Resources

* Legal assistance establishment and retainers
* Employment policies
* Valid employee handbooks
* Manage insurance for Employment Practices Liability (EPLI)
* Unemployment claims administration
* Background checks
* Audit compliance with Wage and Hour (FLSA)
* Audit compliance with ADA – Disability Act
* Audit compliance with EEOC
* Audit compliance with OSHA
* Attendance audits
* Employment applications
* Applicant interviewer training practices
* I9 compliance

The exact set of services bundled for a PEO client are customized to the needs of the employer and his employees. The employer saves money, time and aggravation by partnering with a PEO.

Onsite Triage Savings are no Accident

Convenience Store Decisions

Curtis Smith

Innovative ways to lower workers’ compensation costs with strategic sourcing.

There's a clear need for keeping workers' compensation costs down, but simply reducing benefits is not a practical answer. Human resources, safety and risk managers in the convenience store industry need to consider innovative approaches to improving employee health and safety while containing workers' compensation costs for the employer. The industry needs healthy employees in order to be productive, and people without effective health care cost employers and society more in the long run.

One viable option is "strategic sourcing." Workplace health care is a strong candidate for outsourcing because of rapidly rising costs, an increasingly complex regulatory environment and the growing need for sophisticated clinical and technical capabilities. Companies partner with providers of specialized occupational healthcare services because of their specific expertise, experience and results in delivering health care onsite and online in the workplace. Innovative, new approaches to containing workers' compensation costs are emerging from outsourced partners.

Why C-Stores Outsource Health Care

There are several reasons why convenience stores outsource health care:

* COST SAVINGS. Reducing workers' compensation costs through improved health services is a key focus. The amount of savings can vary, principally on what the costs are before the strategic outsourcer is brought in. In a hard insurance market where most companies work to limit the annual increase in their health costs, some stores actually see total incurred workers' compensation costs decrease.
* IMPROVED SYSTEMS. Outsourcing firms often achieve better results because they are focused on their core competency: delivering health care in the workplace. They have developed the proprietary systems necessary to be successful, including recruiting and training nurses and doctors who are best suited to workplace health care. These resources cost millions of dollars and take many years to develop. Outsourcing businesses can deliver them economically because the cost is spread over a vast client base.
* SHARPER FOCUS. Freeing key managers' time and efforts to focus on core competencies is a real advantage of outsourcing. For example, companies typically want HR managers hiring, training and supporting the people that are mission-critical to their business, not hiring nurses and overseeing a medical department. The same is true for safety departments, which are often also tasked with other regulatory responsibilities.
* PRODUCTIVITY. Better medical results raise stores' productivity because treating more employees onsite keeps them on the job. Taking preventive measures that support safety helps prevent injuries that could present a drain to workers' compensation costs. Should an injury or illness occur, improving case management and accommodating restrictions also helps employees return to work sooner.

While health care delivery in the convenience store industry is not new, the way it is delivered has recently taken a novel turn. Outsourcing providers have made great strides in offering a variety of innovative services, including patented software, specially trained staff and proprietary systems to deliver injury triage, drug and alcohol testing and background screening services. There are several health care outsourcing services that contribute to cost savings and improved worker safety, some of which have helped many convenience stores reduce injury claims by up to 50%.

Field Notes: UDF Turns to 24/7 Injury Reporting and Triage

When an employee is hurt at work, convenience store managers have few good options for responding. Typically, there is no one on staff at the store with medical training to provide adequate care or even to make a reliable decision about the seriousness of the injury. Sending employees to acute care clinics can incur costs that, in hindsight, were not needed. On the other hand, not sending employees may incur unacceptable risks. After hours and on weekends, emergency departments may be the only available provider—the most expensive choice. Too often owners or insurance managers do not even find out about claims until after the fact.

United Dairy Farmers (UDF) is a good example of a convenience chain using an innovative way to reduce the number of injury claims on the job. Cincinnati-based UDF operates nearly 200 stores throughout Ohio, Kentucky and Indiana. The chain combines the nostalgia of an old-fashioned ice cream parlor with all the benefits of a modern convenience store, and, in many cases, UDF stores are linked alongside full-service gas stations.

When Donna Hadley, UDF's manager of payroll and benefits, was looking for a better way to reduce on-the-job-injury costs, she turned to Medcor's 24/7 injury reporting and triage service. In this type of service, specially trained nurses are available to clients 24 hours a day. Whenever an injury occurs, employees can call a toll-free number and speak directly to a registered nurse. Using proprietary software and physician-designed algorithms, nurses determine the severity of the injury and the best course of action. Unnecessary medical care is avoided. Many cases can be resolved with simple first aid. Store managers can be rest assured that potentially serious cases are referred and never minimized. If the employer's insurance includes a preferred network, the system automatically directs employees to those providers. Translators are also available for employees who are not comfortable speaking English.

"Prior to the triage service, we had an employee injury report hotline: me. A lot of times, messages would be incomplete and I'd spend hours or even days tracking down the right details. Now, I get faxed a comprehensive report almost immediately after an injury occurs."Donna Hadley, UDF's manager of payroll and benefits.

All calls are digitally recorded, providing both deterrence and defense against fraudulent claims. Confidential reports about all incidents are sent to the employer's designated managers within minutes of the call. "Prior to the telephone triage service, many workers were using the emergency room because they didn't have a primary medical care provider, and visits to the ER for a minor injury cost as much as $800 per visit," Hadley said. "Now, the hotline nurse can direct employees to an occupational medical clinic if necessary, where a bill for treating the same injury might be closer to $80. In many cases, the self-care instruction provided by the triage nurse is sufficient, so costs can be avoided all together."

Many convenience stores find that, aside from telephone and online triage and reporting, outsourcing-more "traditional" approaches to a health care services firm can help further control costs and improve employee safety. Two such examples are drug and alcohol testing and background screening.

Drug and Alcohol Testing

Nationwide, one in 10 employees has a drug problem, and alcohol abuse rates are even higher. Drug and alcohol abuse contributes to thousands of workplace injuries and millions of dollars of related costs every year. Customer service, attendance and productivity are also affected. Drug testing is difficult to implement, especially for small worksites like convenience stores. Franchisees are challenged by complex drug laws that can vary by state, privacy regulations and concerns about the speed, cost, accuracy and liabilities of testing.

Solving these problems is worth the effort. Recent studies have shown employers that implement drug testing have reduced workplace injury rates by 51% within two years. These same employers saw an average reduction of 11% in their workers' compensation experience rating when they renew their insurance. When deciding whether to outsource drug and alcohol testing services, there are several important factors to consider. The health care outsourcing firm should offer policy review and development to fit each client; collection sites and 24/7 service anywhere in the country; all necessary forms and supplies; certified labs with GC/MC confirmation; physician medical review; new-hire, random, post-accident, and other tests; rapid and confidential results and reports over a secure Web-based system; and fast and friendly customer service representatives. Finally, the provider's legal staff should ensure all services are in compliance with the laws in each state.

Background Screening

Recruiting good employees is critical to every convenience store operation, and background checks and other new-hire screenings are vital components of this process. Effective screening also reduces turnover, prevents unnecessary training costs and improves retention and morale—all contributing to a great culture. Background screening services should include criminal history, education verification, prior employment confirmation, reference checking, motor vehicle records and credit reports. Health care outsourcing firms should also provide program review and development to ensure each franchisee has the right policy and only uses the screening services they really need and from which they can really benefit. Purchasing screening services that are not required is an unnecessary expenditure that counteracts cost-containing occupational health strategies.

Conclusion

Workplace injury management is one area where improved quality costs less, as is the case with UDF. It is in every convenience store's interest— and every employee's interest—to have a safe workplace, to use best practices in treating injuries when they do occur and to manage cases and regulatory health services effectively. While employee testing, screening and injury prevention is critical, the highest safety provisions do not always guarantee the inevitable. Using on-site and online outsourcing services through a knowledgeable and experienced health care outsource provider puts you in greater control, keeps your occupational health team focused on important issues and significantly reduces workers' compensation costs.

PEOs cover ABCs of Human Resources

Akron Beacon Journal

Companies take care of hiring, payroll and benefits

For many small businesses, the administrative burdens of hiring, managing and paying employees can be overwhelming. As a result, many business owners are turning to alternative methods of hiring staff, including something called the "professional employer organization'' or "PEO''.

PEOs are companies that help businesses find and hire people, plus manage such things as health benefits, workers' compensation claims, payroll, unemployment insurance and more. As a business owner, you contract with a PEO to assume these and other responsibilities, allowing you to concentrate on the revenue-producing side of your operations. PEOs establish and maintain an employer relationship with the workers assigned to you and assume many employer responsibilities and risks.

Most small businesses are new to the ``human resources'' or ``HR'' field. One advantage of using a professional employer organization is that they already have experienced HR pros who can handle benefits, payroll, Occupational Safety and Health Administration compliance and just about everything else you will need. By bringing employees into a larger overall group, a PEO can offer your workers benefits, such as health insurance and retirement plans, that you would be hard-pressed to deliver on your own.

Pre-employment testing is another area where PEOs can help. Without a screening process, you risk placing the wrong person in the job, leading to lost productivity and costly turnover. PEOs tailor pre-employment tests to predict loyalty to you as well as success on a specific job. The tests aren't foolproof, but they can have a big impact.

Small-business owners often dread the prospect of reading stacks of resumes and conducting interviews for prospective hires. PEOs can reduce this burden and deliver candidates quickly, then handle the paperwork for the new hire. Some PEOs have entire divisions devoted to recruiting and helping small-business owners gather information to make the right hiring decisions.

Many entrepreneurs who have used PEOs credit the choice with helping grow their businesses quickly. The National Association of Professional Employer Organizations (NAPEO) is a good source of information and help. The organization's Web site at www.napeo.org describes how PEOs work, the benefits of using one and guidelines for selecting one that's right for your business.

Is It Time to Outsource Your HR?

By Layne Davlin

When the time comes to start hiring staff, a lot of entrepreneurs fail to give much thought to all the responsibilities that come with being an employer. The average small-business owner isn’t equipped with either the knowledge or the time to comply with the mountain of regulations required by the government. Fortunately, HR outsourcing--hiring a PEO to oversee your HR tasks--is a solution that not only provides help with compliance issues but can also provide assistance that’s tailored to your company’s specific needs.

A PEO, or Professional Employer Organization, can offer HR solutions tailored to small and midsized businesses in all industries. For an annual fee, usually 2 to 7 percent of the dollar value of your annual payroll, a PEO will take care of everything from recruiting and hiring to managing your health benefits. Since many smaller businesses can’t afford to hire an HR professional, PEOs can be a cost-conscious option. For instance, if a company has a $1 million payroll, a PEO can provide the equivalent of a full HR department for roughly $20,000 to $70,000 a year, considerably less than a fully staffed HR department or even one qualified executive.

Generally, a PEO will legally hire a company's current employees, thereby making the PEO the "employer of record" for taxation and insurance purposes. Having the employees of multiple businesses “on staff” allows PEOs to enjoy lower benefits’ costs because more employees mean better rates. The employees are then leased back to the original employer (now a PEO client) under a shared-employment contractual relationship, which sets out the powers, responsibilities and liabilities of the parties. This practice is also known as “employee leasing” or “staff leasing".

The PEO then assumes responsibility for all payroll obligations, workers’ compensation coverage and tax filings. Additionally, health, welfare and retirement benefits can be contracted as well as all associated administrative work. Because they take over most of the headaches of being an employer, PEOs are ideal for small businesses. In fact, most PEOs target companies that have 150 employees or less.

Many times, a PEO arrangement is the only way a small business can offer benefits like health insurance, dental and vision care, life insurance, retirement saving plans like 401(k)s, Section 125 cafeteria plans (flexible spending accounts for healthcare and childcare), job counseling, adoption assistance and educational benefits. Most small businesses just couldn’t afford or manage these benefits on their own.

Finding the Right PEO for Your Company

Ideally, a PEO will relieve its client companies of the time-consuming and money-draining burdens associated with HR. Because PEOs offer many different types of services, choosing the right PEO is essential. If you’re thinking about hiring a PEO for your business, consider the following factors to find the best possible PEO arrangement to meet your needs:

• Conduct a basic needs analysis. Lay out exactly what type of HR and risk management concerns your company has.
• Review the services of all the PEO firms you’re considering. Find out which firms can meet all your needs and will do so in a manner that meets--if not exceeds--your expectations.
• Perform extensive background research to find out if the PEOs’ sales pitches are really what they deliver.
• Check out the companies' staff. Does it have the depth and expertise to deliver on its promises?
• Find out how the firms deliver their services. In person? By phone? Via the web? A mix of all three?
• Determine what kind of consulting the PEOs provide on strategic HR issues like recruiting, HR procedures and processes.
• Ask for a few references, and then check them. If a particular PEO can’t relieve your HR burden, one of the other ones certainly can.
• Find out if the PEOs charge any upfront fees and how those fees are determined. What about pre-payments? Do you have to put up a deposit?
• Ask for some demonstration that payroll taxes and insurance premiums are being paid properly, and that any past clients’ legal issues have been correctly and efficiently handled.
• Once you’ve selected the PEO you’ll be hiring, lay the foundation for a lasting relationship with your PEO by meeting the people you’ll be working with face to face. An open line of friendly communication ensures you won’t be lost in the in-box.

The bottom line is, PEOs can help small and midsized employers enjoy the same HR benefits as large companies without the considerable overhead. A PEO costs less than hiring an internal HR employee and will maintain critical employment records and payroll reports, as well as provide the forms needed to make sure you’re in compliance with all required employee regulations. Being an entrepreneur is difficult enough without all the accompanying HR hassles, so find a PEO for your company today.

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