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Creative employment relationships under scrutiny

Companies have been shifting employees to independent contractors, but the practice has recently come under greater scrutiny by state and federal agencies. Uber is challenging a California decision. FedEx has taken a different route and settled a large lawsuit in California, but is fighting misclassification cases in other states.

Now employers are looking to other employment relationships to shift workers off formal payrolls and reduce their costs. The Wall Street Journal reports that businesses are setting up more workers as franchisees or owners of limited liability companies.

For employers, the greatest risk from misclassifying workers is often tax enforcement rather than employee lawsuits.

Despite budgetary constraints, the Internal Revenue Service continues to make employment tax compliance a priority. Last year, it conducted 120 criminal investigations into employment tax evasion. The failure to comply with tax laws can easily result in large penalties and even the personal liability of corporate officers and criminal prosecution.

Labor investigations into the new practices have found construction workers who were employees one day and then owners of LLCs doing the same work several days later. Construction firms using this strategy to avoid payroll taxes must now pay back wages, damages and penalties.

Another area of focus is the sale of franchises to lower wage workers, such as cleaners and delivery drivers. If using the franchise model to avoid minimum-wage pay requirements and overtime, there can be issues down the road.

Cost savings from shifting employees to independent contractors and franchise or LLC owners can quickly evaporate when faced with a labor department or IRS investigation. To limit the risk of an audit, discuss your business needs and hiring plans with a tax attorney to ensure compliance with tax regulations.

Source: Wall Street Journal, “Bosses Reclassify Workers to Cut Costs,” Lauren Weber, June, 30 2015

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