Month: January 2020

The “New” IRS Independent Contractor Test – The More Things Change the More They Stay the Same

OVERVIEW

Proper characterization of workers as independent contractors or employees is a question that crosses many areas of substantive state and federal law, prominently federal tax law.

IRS Publication 15-A, Employer’s Supplemental Tax Guide (2020) (Dec 23, 2019), https://www.irs.gov/pub/irs-pdf/p15a.pdf (“Pub. 15-A”) announces relevant new or changed standards to be used by the Internal Revenue Service in making these determinations for tax year 2020. Pub. 15-A announces a policy of the IRS to focus on three “areas” of criteria in applying the preexisting “control test.” Significantly, the fundamental “control test” and its prior explication set out by the Service in the so-called “20 Factor” test remain valid.

Pub. 15-A also announced a new reporting form for mandatory employer use in reporting of workers determined to be independent contractors.

For completeness, I note that Pub. 15-A also discusses the threshold determination of “Who Are Employees?” and outlines the four types of business relations between the employer and persons performing services, which are:

  • Independent contractor;
  • Common-law employee;
  • Statutory employee; or,
  • Statutory non-employee.

See, Pub. 15-A pages 5-7, including examples of each.

Additional resources and comments are included in the last section below.

1. CONTROL TEST, REDUX

It is of course an understatement to say that there are multiple tests and lists of criteria for characterization of a worker as an employee or independent contractor, developed under the Internal Revenue Code for revenue purposes, under other federal laws for other regulatory purposes, and under state law for purposes arising otherwise. (The scope of Michigan or other state law is beyond this Note).

The thrust of Pub. 15-A appears to bring some additional order or guidance to preexisting criteria, and not to change those criteria or tests.

Under Pub. 15-A, the overarching issue in determining whether a worker is an employee or independent contractor remains the level of authority the employer retains to direct and control the worker’s activities. “In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.” Pub. 15-A p. 7 “Common-Law Rules” section. See generally, Pub. 15-A pp. 7-10.

The 20-Factor Test Remains Valid. The longstanding “20 factor” test to distinguish an independent contractor from an employee, set forth in Rev. Rul. 87-41, remains valid.

“Grouping” of Factors. Effective January 1, 2020, the IRS will “group” factors and focus on three areas of the control test:

  • Behavior Control;
  • Financial Control; and,
  • The type of relationship of the parties.

Pub. 15-A provides:

“Behavior Control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:”

  • Exercise of direction over time and place and sequence or means of work;
  • Whose instrumentalities (tools or equipment) are used;
  • Engagement of other workers;
  • Whether specific duties are assigned to a specific worker;
  • Instructions that the business gives to the worker;
  • Training that the business gives to the worker.

“Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include:”

  • Who pays unreimbursed business expenses;
  • The extent of the worker’s investment in facilities or tools used;
  • The extent to which the worker makes the services available to the relevant market;
  • How the business pays the worker (salary or wage vs. fee-based);
  • The extent to which the worker realizes profit or loss.

“Type of relationship. Facts that show the parties’ type of relationship include:”

  • Existence and terms of a written contract;
  • Provision of benefits to worker;
  • Permanency of relationship;
  • Whether the services involved are a regular business activity of the employer.

2. NEW REPORTING REQUIREMENT

The 1099-MISC form previously used for reporting of independent contractor compensation has been a confusing “collection bin” for various characterization and reporting issues beyond that status. For tax year 2020, Employers are required to use a new reporting form, 1099-NEC Nonemployee Compensation, replacing the prior 1099-MISC to report compensation payments to persons the employer elects to characterize as independent contractors. See, About Form 1099 NEC, Nonemployee Compensation, https://www.irs.gov/forms-pubs/about-form-1099-nec, and form 1099-NEC, available at https://www.irs.gov/pub/irs-pdf/f1099nec.pdf.

3. FURTHER CONSIDERATIONS

Workers Misclassified? What to Do? The IRS Voluntary Classification Settlement Program provides guidelines to be followed by employers wishing to reclassify workers for future tax periods. See, Pub. 15-A p. 7 and Voluntary Classification Settlement Program. https://www.irs.gov/businesses/small-businesses-self-employed/voluntary-classification-settlement-program.

Relief from Liability for Mischaracterization. Unchanged by Pub. 15-A, the IRS provides potential “safe harbor” relief from liability arising from mis-characterization and mis-reporting under Section 530 of the Revenue Act of 1978, P.L. 95-600. The reporting business must meet all of the following:

  • Reporting consistency;
  • Substantive (fact) consistency; and,
  • Reasonable basis for the characterization.

See, Publication 1976, Do You Qualify for Relief Under Section 530? At https://www.irs.gov/pub/irs-pdf/p1976.pdf.

Department of Labor Test For FLSA. The Fair Labor Standards Act (FLSA) overtime and minimum wage requirements do not apply to independent contractors. The DOL website comments that a worker may be properly characterized as an independent contractor under other statutory schemes, but not for FLSA enforcement purposes. See, Get the Facts on Misclassification Under the Fair Labor Standards Act, https://www.dol.gov/whd/workers/Misclassification/misclassification-facts.pdf. The DOL notes that proper classification depends on the totality of the circumstances of the activity or situation, not a specific rule or test. See, DOL Fact Sheet 13, Employment Relationship Under the Fair Labor Standards Act (July 2008), https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship.

If you have any questions on these changes, please contact Dave Houston at 517.377.0855 or dhouston@fraserlawfirm.com.

Fraser Trebilcock Shareholder Dave Houston has nearly 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

Michigan Court of Appeals Invalidates Lame Duck Laws Restricting Voter Initiatives

Act No. 608 of the Public Acts of 2018, approved and given immediate effect in that year’s lame duck session, amended several provisions of the Michigan Election Law to create new more restrictive procedural requirements governing voter initiatives proposing initiated laws, constitutional amendments, and referendum of legislation. Most notably, the act required that no more than 15% of the petition signatures used to determine the sufficiency of support for an initiative petition may be provided by voters in any single congressional election district – a restrictive requirement finding no support in the governing constitutional language. Other new provisions required that initiative petitions include a check box to identify petition circulators as volunteers or paid circulators and required paid circulators to file an affidavit identifying themselves as such before circulating petitions for voter signatures.

This legislation has been widely criticized as an impermissible attempt to limit the People’s constitutionally-reserved right to pursue voter initiatives proposing amendment of the Constitution, adoption of initiated laws, and referendum of enacted legislation. The new restrictions pertaining to the collection of petition signatures were particularly problematic in light of abundant case law from our Supreme Court holding that the Legislature may not impose statutory restrictions that curtail or unduly burden the free exercise of the People’s constitutional right to pursue voter-initiated proposals. Thus, it came as no surprise that the constitutional validity of this new legislation has been challenged in the courts.

On January 27, 2020, the Michigan Court of Appeals issued its published decision addressing the constitutional challenges to 2018 PA 608 in the consolidated cases of League of Women Voters, et al. v Jocelyn Benson and Senate and House of Representatives v Jocelyn Benson.  (Court of Appeals Docket Nos. 350938 and 351073) In an Opinion written by Judge Deborah Servitto and joined by Judge Michael Gadola, the Court affirmed the decision of Court of Claims Judge Cynthia Stephens holding that the new 15% limitation on petition signatures collected from any single congressional district and the new requirement that petitions include a check box identifying the circulator as a paid or volunteer circulator are unconstitutional and therefore cannot be enforced. The Court of Appeals also agreed with the League of Women Voters and the Secretary of State that the new requirement for paid circulators to file an affidavit identifying themselves as paid circulators before circulating petitions is also unconstitutional and therefore cannot be enforced, reversing Judge Stephens’ decision to the contrary.  And like Judge Stephens, the Court of Appeals majority found that the Michigan Senate and House of Representatives lacked standing to pursue their claim for declaratory relief but received their briefs and considered their arguments in support of the legislation, nonetheless.

Judge Mark Boonstra wrote a separate Opinion concurring in part and dissenting in part. He disagreed with the majority’s holding that the Legislature lacked standing to present its claims and its conclusion that the new check box requirement was unconstitutional but agreed that the new 15% signature limitation and the affidavit requirement were unconstitutional and could not be enforced.

Secretary of State Benson had joined the League of Women Voters in challenging the constitutionality of Act 608, and thus, the Senate and House of Representatives are the only parties that will have cause to seek further review in the Supreme Court.  The Supreme Court, which had previously called for an expedited adjudication of this matter, has ordered that any application for leave to appeal this decision of the Court of Appeals to that Court must be filed no later than Monday, February 3rd.,  so it will soon become known whether further review of this matter will be pursued.

Graham K. Crabtree has been an appellate specialist in the Lansing office of Fraser Trebilcock since 1996. He was previously employed as Majority Counsel to the Judiciary Committee of the Michigan Senate from 1991 to 1996 and has been a member of the State Bar Appellate Practice Section Council since 2007.

Client Reminder: Form W-2 Reporting Due for Employer-Provided Health Care / Disclosure Due to CMS for Medicare Part D

Upcoming Deadlines: (1) Form W-2 Reporting of Employer-Provided Health Coverage; And (2) Medicare Part D Notices to CMS

Reminder: Form W-2 Reporting on Aggregate Cost of Employer Sponsored Coverage

Unless subject to an exemption, employers must report the aggregate cost of employer-sponsored health coverage provided in 2019 on their employees’ Form W-2 (Code DD in Box 12) issued in January 2020. Please see IRS Notice 2012-09 and our previous e-mail alerts for more information.

The following IRS link is helpful and includes a chart setting forth various types of coverage and whether reporting is required: http://www.irs.gov/Affordable-Care-Act/Form-W-2-Reporting-of-Employer-Sponsored-Health-Coverage. Please note this is a summary only and Notice 2012-09 should also be consulted. The IRS has issued questions and answers regarding reporting the cost of coverage under an employer-sponsored group health plan, which can be found here: https://www.irs.gov/newsroom/employer-provided-health-coverage-informational-reporting-requirements-questions-and-answers.

If you have questions regarding whether you or your particular benefits are subject to reporting, please feel free to contact us.

Deadline Coming Up for Calendar Year Plans to Submit Medicare Part D Notice to CMS

As you know, group health plans offering prescription drug coverage are required to disclose to all Part D-eligible individuals who are enrolled in or were seeking to enroll in the group health plan coverage whether such coverage was “actuarially equivalent,” i.e., creditable. (Coverage is creditable if its actuarial value equals or exceeds the actuarial value of standard prescription drug coverage under Part D). This notice is required to be provided to all Part D eligible persons, including active employees, retirees, spouses, dependents and COBRA qualified beneficiaries.

The regulations also require group health plan sponsors with Part D eligible individuals to submit a similar notice to the Centers for Medicare and Medicaid Services (“CMS”). Specifically, employers must electronically file these notices each year through the form supplied on the CMS website.

The filing deadline is 60 days following the first day of the plan year. If you operate a calendar year plan, the deadline is the end of February. If you operate a non-calendar year plan, please be sure to keep track of your deadline.

At a minimum, the Disclosure to CMS Form must be provided to CMS annually and upon the occurrence of certain other events including:

  1. Within 60 days after the beginning date of the plan year for which disclosure is provided;
  2. Within 30 days after termination of the prescription drug plan; and
  3. Within 30 days after any change in creditable status of the prescription drug plan.

 The Disclosure to CMS Form must be completed online at the CMS Creditable Coverage Disclosure to CMS Form web page at:
https://www.cms.gov/Medicare/Prescription-Drug-Coverage/CreditableCoverage/CCDisclosureForm.html.

  1. The online process is composed of the following three step process: Enter the Disclosure Information;
  2. Verify and Submit Disclosure Information; and
  3. Receive Submission Confirmation.

The Disclosure to CMS Form requires employers to provide detailed information to CMS including but not limited to, the name of the entity offering coverage, whether the entity has any subsidiaries, the number of benefit options offered, the creditable coverage status of the options offered, the period covered by the Disclosure to CMS Form, the number of Part D eligible individuals, the date of the notice of creditable coverage, and any change in creditable coverage status.

For more information about this disclosure requirement (instructions for submitting the notice), please see the CMS website for updated guidance at: https://www.cms.gov/Medicare/Prescription-Drug-Coverage/CreditableCoverage/CCDisclosure.html.

As with the Part D Notices to Part D Medicare-eligible individuals, while nothing in the regulations prevents a third-party from submitting the notices (such as a TPA or insurer), ultimate responsibility falls on the plan sponsor.

This email serves solely as a general summary of the Form W-2 reporting requirements and CMS disclosure for Medicare Part D.

Elizabeth H. Latchana, Attorney Fraser TrebilcockElizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.