For a copy of the following presentation, please visit our

1. This UBA Employer Webinar Series is brought to you by United Benefit Advisorsin conjunction with Jackson Lewis For a copy of the following presentation, please visit our website at www.UBAbenefits.com. Go to the Wisdom tab and then to the HR webinar series page.

2. Presented by: Randy Limbeck (Omaha) Kathleen Reilly Barrow (Omaha/Rapid City) May 16, 2013 Are You My Employee?Worker Classification: Truth or Consequences

3. About the Firm Represents management exclusively in every aspect of employment, benefits, labor, and immigration law and related litigation Over 700 attorneys in 49 locations nationwide Current caseload of over 5,000 litigations and approximately 300 class actions Founding member of L&E Global

4. Disclaimer This presentation provides general information regarding its subject and explicitly may not be construed as providing any individualized advice concerning particular circumstances. Persons needing advice concerning particular circumstances must consult counsel concerning those circumstances.  Indeed, health care reform law is highly complicated and it supplements and amends an existing expansive and interconnected body of statutory and case law and regulations (e.g., ERISA, IRC, PHS, COBRA, HIPAA, etc.).  The solutions to any given business’s health care reform compliance and design issues depend on too many varied factors to list, including but not limited to, the size of the employer (which depends on complex business ownership and employee counting rules), whether the employer has a fully-insured or self-funded group health plan, whether its employees work full time or part time, the importance of group health coverage to the employer’s recruitment and retention goals,  whether the employer has a collectively-bargained workforce, whether the employer has leased employees, the cost of the current group health coverage and extent to which employees must pay that cost, where the employer/employees are located, whether the employer is a religious organization, what the current plan covers and whether that coverage meets minimum requirements, and many other factors.  IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)

5. Defining the Issue • Up to 30% of employers misclassify workers • 3.4 million workers are contractors, when they should be employees • Revenue loss to US Treasury is $3.4 billion, annually • Income tax • Social Security • Medicare • Unemployment Insurance Trust Fund

6. Response of the Internal Revenue Service • Form SS-8s sent to self-employed individuals who receive Form 1099 • Questionnaires to sponsors of employee benefit plans • Information sharing with DOL, state unemployment and taxing agencies • Form 211- Whistleblower Program • Up to 30% of tax, penalty and interest recovery for individual transactions of $200,000 or more and corporate transactions of $2 million or more • Up to 15% of tax, penalty and interest for lesser transactions

7. Reaction of the DOL OFCCP allocates $3.6 million and 11 FTEs to address misclassification in government contract operation Office of the Solicitor allocates $1.4 million and 7 FTEs to bring multi-state litigation against large employers determined to “abuse” independent contractor status OSHA adds 2 FTEs to train inspectors on worker classification issues

8. General Legal Risk of Worker Misclassification • Employment taxes • Past federal payroll taxes (3 years back, or more) • State payroll taxes • Up to 100% penalty—if willful failure • Income tax not withheld • Trust fund recovery penalty for responsible persons • Minimum wage and overtime • Minimum wage/overtime (up to 6 years) • Liquidated damages (100% penalty) • Application of damage model to all workers in same job, not just individual worker • DOL supervision over payment of wages • Attorneys’ fees and costs • Unfair labor practices liability (different test than IRS) • Unions see independent contractors as potential members • Violation of terms of government contracts as to prevailing wage, etc. • Employee benefit plan operational failures (Note: No statute of limitations)

9. More on Employee Benefit Plan Exposure • Welfare plans • Premium costs • Lost benefits • Loss of income tax exclusion for premium costs of highly compensated employee/participants • Disqualification of cafeteria plans/flexible spending arrangements • Retirement plans • Disqualification of qualified retirement plan

10. More on Employee Benefit Plan Exposure • Defined Benefit Pension Plan • Retroactive coverage and accrual of benefits • Plan contribution sufficient to fund additional benefits

11. More on Employee Benefit Plan Exposure • 401(k) plans • 50% of average elective deferral for all years of eligibility • Matching contributions • Investment earnings • Cost Correction with DOL and IRS for plan failures (Sanctions) • Draft ALL employee benefit plans so that workers who are inadvertently excluded from plan participation due to misclassification are not permitted an award of past benefits

12. The ACA and Worker Classification The inquiry into whether a business is an “applicable large employer that must “pay or play” requires employers to “count” full-time and full-time equivalent “employees” The obligation to make an offer of minimum essential coverage requires the employer to determine who are full-time “employees” under the ACA The determination of the nature and amount of exposure to penalties under Code section 4980H thus requires, as a threshold matter, that the business identifies who, among its various workers and service providers, are “employees.”

13. The “Classification Test” Under the ACA To classify workers, the ACA Proposed Regulations rely upon the Treasury Regulations promulgated under the specific provisions of the Internal Revenue Code governing payroll taxes. These Regulations adopt a federal common law analysis to determine who is an “employee.” The Regulations require a company to focus upon whether the worker or the company controls the nature of the work that must be done and manner in which the work shall be accomplished.

14. The Classification Analysis Publication 15-A, Employer’s Supplemental Tax Guide (January 29, 2013) creates three types of workers • Independent Contractors • Statutory Employees • Drivers who distribute beverages, meat, vegetables, laundry • Full-time insurance agents who work primarily for one insurance company • At-home “piece work” workers (such as seamstresses) • Full-time sales persons of certain wholesale or retail goods • Common Law Employees • Facts Showing Behavioral Control • Facts Indicating Financial Control • Facts Demonstrating the Nature of the Parties’ Relationship

15. Statutory Non-employees • Licensed Real Estate Agents • Real estate sales agents and brokers • Real estate appraisers • Direct Sellers • Persons who solicit sales of products from homes or businesses • Newspaper distributors to homes • Companion Sitters • Personal attendants to the elderly • Nannies who care for children • Individuals who provide household care services to the elderly

16. Behavioral Control Analysis examines evidence indicating whether the company provides instruction to the worker as to: • When and where to work; • What tools or equipment to use; • Where to purchase supplies; • Who, among workers should perform what task; • Which of many tasks comprising the job should be undertaken in what order; and • Whether the company trains the worker as to the services performed

17. Financial Control Analysis examines evidence of facts demonstrating whether the worker effectively is operating his or her own business: • Whether the worker bears the risk of profitability in the relationship; • Whether the worker incurs costs of operating the business; • The extent to which the worker makes a significant investment in the place of work and tools of work; • The degree to which the worker advertises his or her services to other non-related companies; and • How the worker is paid (regular, guaranteed incremental payments indicate worker is employee)

18. Nature of the Relationship The Analysis examines evidence indicating: • Whether the relationship between the worker continues indefinitely or exists only for the duration of a specific project; • Whether the workers’ services are an integral aspect of the company’s regular business activity; • Whether the worker’s services are key to the company’s ability to render services or provide products to customers; • Whether a written contract for services exists between the parties (Note: the existence of a written contract will be disregarded if other factors indicate a common law employment relationship exists; and • Whether the worker or the company provides insurance, benefits, vacation pay, etc.

19. Leased or Temporary Employees • Under the ACA, a leased worker will be deemed an employee if the worker is an employee under the federal tax common law analysis. • Pension plans (See IRS Pub. 560) • Common law analysis is still over-riding consideration • General Rule is leased worker must be treated as the employee of the company that is the recipient of services if • The worker provides services under and agreement between service recipient and the leasing organization • The worker has performed services full-time for at least a year • The worker performs services under the recipient company’s direction and control • But an exception exists-- • If leased workers are not more than 20% of non-highly compensated employees • Leased worker is covered under leasing company qualified pension plan and • Pension plan is money purchase plan that has (a) immediate participation; (b) full and immediate vesting; and (c) employer contribution of at least 10% for each participant

20. IRS Examples Independent Contractor: Bill Plum, is the worker who contracted with Elm Corporation to provide roofing at a housing complex. A signed agreement provided that Bill would be paid on a flat fee. Bill is a licensed roofer who carries workers’ compensation insurance and liability insurance for his “DBA” Plum Roofing. Bill hires workers who he treats as employees. Bill pays for any damages to property caused by him or his workers while performing services. Employee: Milton Manning is an experienced tile/flooring installer. He orally agrees to provide services installing tile at a construction site with a primary building contractor. He uses his own tools and installs tile according to the schedule of the builder. The builder provides all tile, grout, and other materials and gives Milton job specifications. The builder inspects Milton’s work. The builder insures the construction site and carries workers’ compensation insurance. Milton does not perform services to others.

21. IRS Examples Independent Contractor: An automobile dealership furnishes space for Helen Bach to provide repair services to customers. Helen rents the space, provides her own tools, manages her parts inventory and provides her own supplies. Helen seeks out business from insurance adjusters and other individuals and business. She hires and fires her own assistants and bears the risk of uncollected accounts. Employee: Sam Sparks performs auto repair services for a automobile sales dealership. He works a regular schedule and is paid on a percentage of the repair tickets. The dealership provides the repair shop, parts and supplies, but Sam supplies his own tools. The dealership decides what customers are to be charged, time for completion of repairs and the parts to be used.

22. A Couple of Tax Case Examples Peno Trucking, Inc. v. Commissioner (Tax Court) Peno provided truck drivers under lease agreements with another company. It hired truck drivers under a written agreement that provided the drivers were independent contractors and not employees. Under that contract, drivers were permitted to drive for other companies. Drivers were paid weekly in an amount that was a percentage of Peno’s compensation for each load they transported. Peno provided trucks and equipment, paid fuel and road tolls, provided all maintenance, and controlled dispatch. Drivers, however, had complete discretion to chose their loads—although they had to keep “beepers” to stay in touch with Peno. Both Peno and the drivers could sever the contract at any time. HELD: Drivers are employees. The court focused upon the fact that while drivers could pick loads, Peno controlled all other aspects of the driver’s services: route for delivery; when trucks would receive maintenance; standards for drivers who were hired; and which drivers would work under what third-party leases. Peno, not drivers invested in trucks, fuel, insurance and other substantial cost of doing business. Peno carried the risk of profit or loss. The drivers were absolutely necessary to Peno’s business and tended to have a long-term driving relationship with the company.

23. Tax Case Examples, Cont. Crowd Management Services Inc. v. United States (9th Circuit Court of Appeals) “CMS” provided workers at events to assist with crowd control. Workers were provided materials discussing what areas they were required to secure and the tasks they were to perform at their assigned location. Workers were not told how to secure areas, but supervisors periodically checked their job performance during events. Workers were paid based upon the hours worked at the events they chose. Workers did not get paid if events were cancelled or the equipment they were to use became non-operable. Workers were required to personally pay for uniforms, flashlights, etc. The relationship between CMS and the workers was temporary. Often, workers were college students who worked only when income was needed. HELD: Workers are employees. CMS controlled when the workers arrived at the event; where they worked and told them how to work. CMS consistently supervised workers. It was CMS that made a profit from being able to supply workers for crowd control, not the workers. Workers were assured of being paid when they worked and therefore had little entrepreneurial risk. Finally, the workers’ services were critical to CMS’ ability to provide services to its clients. While one worker might be temporary, the workforce as a whole was both required and permanent.

24. In Doubt?? The IRS offers assistance • Submit a Form SS-8 for determination of a worker’s status • Form asks for information pertinent to the 3 factor test • Form requires information concerning all the workers that perform a particular job • Adverse determination on Form SS-8 submission may provide grounds for “willful” holding by IRS on later audit of classification of workers if independent contractor status is maintained • Voluntary Classification Settlement Program • Eligibility requires that employer presently and uniformly be treating all workers in class as independent contractors; that Form 1099s have been filed for preceding 3 years; and that issue not be under audit by IRS, DOL or state agency for classification issues • Program closes June 30, 2013 • Settlement with IRS does NOT protect employer from negative consequences of misclassification under ERISA, wage and hour, state unemployment compensation, etc.

25. In summary, think: Joe the Plumber “Test”

26. Randy Limbeck limbeckr@jacksonlewis.com Kathleen Barrow barrowk@jacksonlewis.com ANY QUESTIONS?

27. Thank you for your participation in the UBA Employer Webinar Series If your question was not answered during the webinar or if you have a follow-up question, you can email the presenters today or tomorrow at: UBAwebinars@jacksonlewis.com www.UBAbenefits.com www.jacksonlewis.com To obtain a recording of this presentation, or to register for future presentations, contact your local UBA Partner Firm.