Risk Management Challenges

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Risk Management

Challenges or 2010Insight into the misclassifcation o workers and

emerging strategies or business to eectively mitigate

associated risks o worker misclassifcation.

Summary

Companies have to decide what degree o risk is appropriate or

their organization and take proactive steps to review current and

uture programs to avoid unwanted litigation. This may include a

collaborative review o HR practices, contractual or indemnifcation

review, and new programs oered by best in class companies to

provide a compliance frewall to include audits o suppliers and

contractors. Many companies may escalate a review o labor law

changes or strengthen programs that span labor law, immigration

or compliance programs.

These approaches are common sense in the ace o increased

enorcement by State and Federal agencies that will include higher

profles o regulatory watchdog agencies and the undesired

outcome o having unwanted public exposure or companies that

did not heed the call to action.

Introduction

Advantage Resourcing provides stang and outsourced managed

services programs or our North American and global clients

as the seventh largest global stang and solution provider per

industry rankings. A core oering includes programs to provide

risk management and Business Process Outsourcing or our

clients in countries we operate. This includes programs to mitigate

risk or HR & Tax law compliance, local labor laws or overtime,

minimum wage and tenure limitations. For 2010 it will be critical

or public and private companies to review current around worker

misclassifcation, labor law and programs to deliver a compliance

frewall in the ace o new laws and enorcement actions.


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Risk Management Challenges or 2010 WHITE PAPE

Growth o Contingent Labor in

the United States

As jobless claims and layos have

increased, a job or lie has become a legacy

o a ormer generation. Today we see

Fortune 500 companies using contingent

labor as part o a strategic exible

workorce strategy that protects ull time

workers rom seasonal layos that provides

exibility or companies in meeting

seasonal or peak demands. At a recent

Stang Industry Analyst Executive Forum,

it was discussed that the percentage o

contingent workers making up the current

workorce o Fortune 500 companies is 10-

12% o the total workorce, with a trend to

20% a possible outcome or the uture.

While the increase o contingent labor

provides a cost savings o 9% or companies

increasing their percentage o contingent

workers versus permanent employees,the real issue acing the US Government is

worker misclassifcation.

One ederal study concluded that

employers illegally passed o 3.4 million

regular workers as contractors, while the

Labor Department estimates that up

to 30 percent o companies misclassiy

employees.

What does this mean to the

State and Federal Government

and to public and private

businesses?

Many companies have historically

misclassifed employees as independent

contractors, oten due to genuine

conusion over conicting government

rules and court decisions in this area.

However, the motivating actor is

sometimes an eort to avoid overtime

pay requirements, payroll-related

taxes, employment benefts and other

obligations.

Many state governments and Federal

government bodies are recognizing that

misclassiying workers as independent

contractors denies the workers protections

under the wage and hour laws, precludes

such benefts as workers compensation

and unemployment insurance payments,

and denies protection under some non-

discrimination laws. In response, these

government entities are enacting new

legislation and stepping up enorcement o

existing regulations to ensure that workers

are properly classifed and protected.

In early June 2009, Colorado enacted

new laws that impose harsh penaltiesup

to $5,000.00 per employee or a frst oense

and up to $25,000.00 per employee or

subsequent violationson employers that

misclassiy employees as independent

contractors.

Maryland has instituted a Workorce

Fraud Act, which went into eect in

October 2009.

New York States Joint Enorcement

Task Force on Employee Misclassifcation

(Task Force), ormed in 2007, continues to

address, among other things, the problem

o employers who inappropriately classiy

employees as independent contractors.

Ohios attorney general estimates that

his state has 92,500 misclassifed workers,

which has cost the state up to $35 million a

year in unemployment insurance taxes, up

to $103 million in workers compensation

premiums and up to $223 million in income

tax revenue.

One ederal study concluded that

employers illegally passed o 3.4 million

regular workers as contractors, while the

Labor Department estimates that up

to 30 percent o companies misclassiy

employees.

Government Audits and Federal

Scrutiny to Increase in 2010.

Beginning in 2010, the IRS will launch an

audit initiative that will audit the ederal

tax returns o 6,000 companies to assess

compliance with tax and labor regulations.

As part o this audit, the IRS will examine

independent contractor misclassifcation.

The initiative was prompted, in part, by

advice rom the United States Government

One ederal study concluded that employers illegally passed o 3.4 million

regular workers as contractors, while the Labor Department estimates that

up to 30 percent o companies misclassiy employees.


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Risk Management Challenges or 2010 WHITE PAPE

Accountability Oce to the IRS and United States Department

o Labor to step up eorts to reduce the misclassifcation o

independent contractors.

Changes in the Oce o Federal Contract Compliance Programs

(OFCCP) enorcement represent some o the most dramatic

changes in employment law this year. Employers who were not

previously aected by the OFCCP may ace audits or record-keeping

requirements in 2010. Increases in government budget, changes

in organization, political transormation, and tracking o stimulus

unds will result in an overall increase in OFCCP activity, making it an

employment law issue employers cannot aord to ignore.

2011 Federal Budget Allocation and Enorcement

Activities

President Obamas fscal 2011 budget allocates substantial unding

to help the Department o Labor and the Internal Revenue Service

combat employee misclassifcation, both as to independent

contractors and overtime exempt employees. Hundreds o

investigators will be hired to pursue a misclassifcation initiative

to obtain or misclassifed employees overtime pay, social security

contributions, unemployment benefts, health and welare

benefts and retirement benefts provided to employees but not

independent contractors. According to the Presidents budget

report, enhanced enorcement is expected to increase Treasury

receipts by more than $7 billion over ten years. In addition, acing

similar budgetary constraints, many states are stepping up their

enorcement eorts in this area as well. Inadvertent misclassifcation

is a genuine concern or many employers because state and

ederal agencies have applied dierent standards or employee

classifcation.

Business Strategies or 2010

As part o normal business practices, a review o current practices

to review the use o various worker categories to manage the

workorce liecycle is warranted.

Common sense programs may include:

Independent Contractors / 1099s: Review policy or use o

independent contractors and classifcation standards to

ensure that internal or outsourced programs can meet audit

standards or State and Federal standards

Stang Company Worker Roles & Worker Comp

Classifcations- a key area o industry ocus to ensure that

workers are classifed appropriately

Evaluation o outsourced partners and indemnifcation

standards

Fair Labor Standards Act (FLSA) compliance or employers

and stang company vendor management to enorce

Federal minimum wage, overtime, child labor and

recordkeeping requirements.

Review o Work Permits and Visas or North American clients

traveling to support business needs to avoid immigration

law violations Managed Services Program Audits: Review o MSP programs

and audits or I-9s; drug and background standards and a

workers right to work in the key country assigned

Random supplier and worker audits to monitor minimum

wage, overtime and statutory payments or or FLSA

compliance

Reerences:

1. Eric H. Rumbaugh, Esq.; Michael Best & Friedrich LLP; 100 East, Wisconsin Avenue, Suite 3300; Milwaukee, Wisconsin 53202

2. IRS & US Department o Labor websites

3. Stang Industry Analysts (SIA)

4. Caliornia Department o Industrial Relations

5. NY State Department o Labor Misclassifcation_TaskForce_AnnualRpt_2008

6. NY Times Feb17, 2010 Article: US Cracks Down on Contractors as a

Documents

Risk Management Challenges