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Worker Misclassification

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September 27, 2011 | Barbara Baksa

Worker Misclassification

In a flurry of acronyms, the DOL (Department of Labor) and the IRS (I'm sure you all know what this acronym stands for) signed an MOU (Memorandum of Understanding) to improve agency coordination to address worker misclassification. A number of states are also participating in the agreement.

DOL and IRS Sign MOU
The agreement provides that the DOL will share information with the IRS and the participating states to address workers classified as contractors that should really be treated as employees. Worker misclassification is a target of the IRS's current employment tax research study, which I've blogged about before ("IRS Auditing Stock Compensation," June 7, 2011). This MOU will give the IRS additional information to use in its audits.

At the same time, the IRS also announced a voluntary worker classification settlement program, further demonstrating their focus on this issue.

Misclassifying a worker that should be an employee as a consultant can result in a host of legal issues, from benefits that the individual should have been accorded (such as the right to medical benefits and vacation time), tax withholding considerations, overtime pay, and unemployment benefits, to name just a few.

This probably seems like a topic that doesn't impact stock plan administration that much. Worker classification is determined by HR and/or payroll; the stock plan administration group most likely just assumes their determination is correct and treats each individual's options and awards accordingly. And, I can't think of any reason why stock plan administration should question the classification made by HR/payroll; it's unlikely you have sufficient information to determine an individual's employment status.

But, while stock plan administration may not be involved in classifying workers as employees or consultants, you should be aware of the impact misclassification can have on stock compensation awarded to the individuals in question.

Tax Withholding on Options and Awards

Of course, the first issue that comes to mind is tax withholding. Individuals classified as consultants aren't subject to tax withholding.  If these individuals should have been treated as employees, however, then taxes should have been withheld on all of their compensation, including their NQSOs and stock awards.  Failure to withhold the appropriate taxes can result in penalties to the company up to the amount of the taxes that should have been withheld, as well as interest and administrative penalties. 

In addition, the company should have made matching FICA payments on all of the individual's compensation, also including NQSOs and stock awards.  This is even more of a mess because consultants don't pay FICA, they pay self-employment tax, which is equal to both the individual and company portion of FICA.  The misclassified workers will have overpaid their taxes because, as employees, they would only have been responsible for the employee portion of FICA.


The company's Section 423 ESPP is a significant concern.  By law, substantially all employees of the company have to be allowed to participate in the ESPP, but, of course, also by law, consultants aren't permitted to participate.  Where consultants should have been treated as a employees, however, it is likely that they should have been permitted to participate in the ESPP.  Where an individual that should have been allowed to participate is excluded from the ESPP, the entire offering(s) that the individual should have been allowed to participate in can be disqualified.  A mistake here could impact not just the misclassified individual but all other employees participating in the ESPP.  When assessing your company's risk with regards to worker misclassification, this is an important consideration. 

Thanks to McGuireWoods for the alert that gave me the idea for this blog entry.

Conference Hotel Almost Sold Out
The 19th Annual NASPP Conference is quickly approaching and the Conference hotel is nearly sold out. The Conference will be held from November 1-4 in San Francisco. The last Conference in San Francisco sold out a month in advance--and that was without the reality of Dodd-Frank and mandatory Say-on-Pay hanging over our heads. With Conference registrations going strong--on track to reach nearly 2,000 attendees--this year's event promises to be just as exciting; register today to ensure you don't miss out.

NASPP "To Do" List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing "to do" list for you here in my blog. 

- Barbara

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