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Budget Battle: Be Prepared for the Perfect Storm

3/16/2015 By Cynthia Waddell

As a former federal employee, I’ve been following the ongoing budget battle between the Obama administration and Congress with bemused interest, especially with regard to the IRS and the Department of Labor. The Obama administration wants to increase the IRS’s budget 18%, to $12.9 billion. For the Department of Labor, the administration proposed $13.2 billion in discretionary authority, coupled with mandatory funding, and 17,880 full-time equivalent employees. Congress is very deficit-weary and resistant to budget increases. The most likely scenario is that spending levels will remain static over the next several years at 2014 to 2015 levels.

So, how does this affect workers who are classified as independent contractors (ICs)?

1. The DOL. The Department of Labor, Wage and Hour Division, has been very effective in identifying, investigating and enforcing wage and hours laws against businesses who misclassify their workers as ICs and don’t pay them overtime. Failure to properly fund and staff the DOL decreases the agency’s ability to enforce regulations and to pursue investigations against reported labor law violations. Workers who are incorrectly classified as ICs are wrongly, even illegally, left out of the protections of FMLA, OSHA, FLSA and other federal worker protections overseen by the Department.

2. The IRS. When a worker is misclassified as an IC, employer taxes (withholding for Social Security, FICA and unemployment) are not withheld, contributing to the tax gap. The tax gap is defined by the IRS as the difference between the true tax liability for a given tax year and the amount that is paid on time. In 1984, the last year for which figures are available, the IRS estimated the gap at $345 billion, with an estimated $1.6 billion resulting from worker misclassification. A new study is underway, but it is clear the cost to federal and state agencies runs in the billions of dollars per year. Bills aimed at reducing misclassification, such as Fair Playing Field Act, have been repeatedly introduced in Congress, but without sufficient bi-partisan support for passage. Keep in mind the IRS has assumed additional responsibilities under the Affordable Care Act (ACA) while processing 160 million returns per year. The IRS must be vigilant against fraudulent return schemes and attempts to hack sensitive taxpayer data.

3. Government agencies are lagging in two key areas: updating technology and pay comparability with the private sector. In October, the Washington Post reported the Federal Salary Council determined federal white collar employees earn 35.3% less than their public sector counterparts. A recent Government Accounting Office (GAO) report published in January 2014 found, “the 1.96 million permanent career employees on board as of September 2012, nearly 270,000 (14 percent) were eligible to retire. By September 2017, nearly 600,000 (around 31 percent) will be eligible to retire, government-wide.” (Source:http://www.gao.gov/products/GAO-14-215). Funding the agencies is critical to ensure federal workers have the automation they need to perform the mission of the agencies they support, and the ability to attract new talent to replace the growing number of workers who will retire within the next few years. The equation is a simple one: outmoded technology + fewer federal employees = less enforcement.

So we are left with the perfect storm: agencies that are unlikely to see any increases to the budget in the foreseeable future; technology and infrastructure that is unable to keep up with growing, complex workloads; and the loss of a large portion of the federal workforce to retirement with an inability to recruit and replace their expertise due to the increasing gap between federal and private sector pay.

What this means to business:

1. If you are audited for a wage or misclassification claim, audit cycles will be extended and it will take longer for your case to be resolved.

2. There will be more reliance on automated processes and information sharing to sustain enforcement efforts (an audit opened with one agency can lead to additional audits with other agencies who share information with the agency auditing you).

3. Business scofflaws who are not in compliance with labor and tax laws will cut their labor costs and undercut the ability of law abiding firms to compete.

This set of conditions can have only an adverse effect on voluntary compliance and create an uneven playing field where non-compliant business gain an unfair advantage. Get ready, the clouds are on the horizon.

Cynthia Waddell
Cynthia Waddell

Get to know Cynthia:
Cynthia is a Senior Compliance Specialist at Populus Group. She has over a decade of experience with the 1099 independent contractor issue, including support of Fortune 500 clients.

Cynthia resides in San Mateo, California with her husband Allen, and a very spoiled poodle named Jackson. Like most stereotypical California transplants, she enjoys good wine, great friends, and likes to “do brunch.”

Questions, comments, brunch? Contact Cynthia at cwaddell@populusgroup.com