If I owned a small business that employs people, I'd make sure that I am getting the following two things right. The risks associated with mistakes in these areas are greater than the benefits derived from being non-compliant.
1. I'd make sure that each employee is properly classified per the Fair Labor Standards Act and I am paying overtime to whom I am supposed to be paying overtime.
Even if you had this right in 2014, you may not have it right in 2016. The Department of Labor proposed some important changes to overtime laws last summer and closed its comment period on those proposed changes in September. The new rules are expected to become law in the first quarter of 2016. The most significant change is increasing the salary test for exempt workers from just under $24,000 per year to potentially over $50,000 per year. That means any manager or supervisor in your company that makes between $24 and $50k is likely to no longer be exempt from overtime pay if they work more than 40 hours in a work week, no matter what their duties are.
Now is a great time to conduct a wage and hour audit to see if you have any potential risks, and to conduct contingency workforce planning to determine how you are going to handle those positions that may no longer be exempt. The penalties if the Department of Labor finds the problems before you do include payment of back wages and liquidated damages to any affected employees as well as fines.
2. I'd make sure that any relationships I have where I am paying a worker by 1099 are legitimate subcontractor relationships and properly documented as such.
Utilizing 1099 workers to supplement your core workforce can be a legitimate and legal strategy. The key is to look at it the way the Department of Labor and the Department of Revenue look at it, not the way many small business owners look at it.
Both the IRS and the DOL consider the use of 1099 a highly abused practice. So the DOL published a guidance in July 2015 to clarify the rules. Before, you might have been able to make a reasonable case that your 1099 workers could work for your competitors if they wanted to - it's not your fault they choose not to. Now, they're looking at the economics - are your 1099 workers performing similar work for other companies besides yours? If the answer is no, and they are working for your company pretty much exclusively, then the IRS and the DOL are going to conclude that those workers should be classified as employees and you should be deducting and submitting payroll taxes, even if you have a signed subcontractor agreement in place. And that's what they want - employers to be withholding and submitting taxes every payday.
The consequences of being ruled against can be quite severe, ranging from payment of back taxes they feel should have been withheld all the way to jail time in extreme cases. As a part of my risk management plan I would look at each relationship in my company and determine, not whether I think it's legitimate, but whether the DOL is likely to consider it to be legitimate. I'd make sure I have an executed contractor agreement with the legitimate ones and I'd go ahead and hire the questionable ones.
An attorney or an HR business partner can help you decide if you're not sure.
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