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January 24, 2011

Seeking an upgrade | Maine's tech sector seeks relief from a crackdown on employee misclassification, heralding a shift toward independent work

Photo/David A. Rodgers Joe Kumiszcza, executive director of TechMaine
Photo/White Richardson Justin Davis, founder and president of Portland Webworks, says he may hire an attorney to ensure his company is meeting complicated worker classification laws
By Jackie Farwell

The typical image of an independent contractor, that class of not-quite-employees now squarely in the crosshairs of state and federal regulators, is of a tool-belted construction worker laboring on a noisy job site filled with the clangs of heavy machinery. But the building trades isn’t the only industry that relies on independent contractors — a more complete picture also includes the khaki-clad software developer clicking away in a cubicle to the hum of a computer.

That’s why Maine’s technology sector has gotten wrapped up in a nationwide crackdown on worker misclassification, a practice more commonly associated with the construction industry that’s estimated to cost the state up to $36 million a year in lost income tax revenues. Now, a technology trade association is pursuing legislation that it believes reflects a fundamental difference between what a carpenter and a code writer bring to their respective jobs.

“The tool is knowledge, not a hammer or a screwdriver,” says Joe Kumiszcza, executive director of TechMaine, a trade group of Maine IT professionals. It’s a distinction that increasingly applies to many sectors of Maine’s economy, where the lines between classes of workers, whether full- or part-time, temporary or independent, are blurring.

Under scrutiny

Worker misclassification — when an employer classifies a employee as an independent contractor and thus avoids paying payroll taxes and workers’ compensation fees — is the focus of both a state task force and the IRS, which announced in 2009 a three-year audit of 6,000 U.S. companies, its first statistical analysis of the issue since 1984. The routing out of offenders, the government says, is designed to protect employees who miss out on health benefits, overtime pay, and, the source of much of the recent scrutiny, unemployment insurance as a result of being misclassified.

In addition to greater cooperation and information sharing among state and federal agencies, skyrocketing unemployment claims are prompting a rise in enforcement.

Out-of-work professionals, who may not realize they’re not entitled to unemployment benefits as independent contractors, apply for those benefits and often put tax collectors hot on their employer’s trail. In 2009, 17% of the companies audited in Maine across all industries misclassified workers, up from 11% in 2002, according to the Maine Department of Labor. The department says it hasn’t boosted the number of audits — holding steady at 2% of all employers annually — but the level of noncompliance has risen as businesses seek to cut costs during the recession.

But even though government officials cite worker exploitation as a reason for the crackdown, many of Maine’s IT professionals are perfectly content to work as contractors, Kumiszcza says. In addition to the independence, mobility and often higher pay it affords, working as a contractor also allows workers to maintain ownership and selling rights to their intellectual property, he says. “They lose a lot of their own juice by giving it away to their employer.” Plus, moving from company to company allows highly skilled workers to delve deeply into projects that maximize their knowledge base, building on their skills and giving them a competitive edge, Kumiszcza says.

As is the case in some other sectors, tech companies often need to add staff quickly to tackle one-time or short-term opportunities, and entry-level temp workers don’t often make the grade. “When a technology company wants to either go for a big contract or work on a new project, they may not have the skill set within their existing developers, or they may not be able to afford a guru,” Kumiszcza says.

The legislation his organization plans to introduce would reclassify tech workers as “learned professionals,” an exemption for well-paid workers whose primary tool is advanced knowledge that would free them from many of the regulatory requirements. As written, the law discourages such skilled professionals from locating in Maine, according to Kumiszcza. “Let’s make Maine a sanctuary for people who can make five hundred dollars an hour,” he says.

Compliance confusion

At IT firm and application developer Portland Webworks, founder and President Justin Davis balances government demands in two very different ways. On one hand, his company counts many public-sector agencies among its clients, including the Maine Office of Tourism, for which it built and maintains an award-winning website. But while Davis is clearly meeting its requirements for well-designed homepages, he’s having a tough time getting a handle on what the government wants from him as an employer, rather than a vendor.

Independent contractors make up a crucial part of Portland Webworks’ 20-person work force, as the company relies on them to deal with the ebb and flow of business. “It’s difficult to ramp up quickly, so when there’s a spike in demand, we’ll bring in independent contractors,” Davis says. But different areas of the state and federal government — the workers’ comp board, unemployment bureau, Maine Revenue Services, the IRS — have varying standards for determining whether a worker should be classified as an employee or a contractor. The lack of consistency isn’t new, but has become a source of greater anxiety in light of the stepped-up enforcement.

Davis is considering hiring an attorney to draft a single checklist for him to consult to make sure he’s in compliance. “No one thinks there’s any exploitation going on,” he says. “It’s frustrating that we need to pay attorneys for something that would seem to be in the state’s best interest.”

Independent contractors are among some of the best paid staff at Portland Webworks, Davis says, and a third of his overall work force were once contractors who have been brought on full time. “It’s a part of our business,” he says. “My understanding of the demands is that we’re meeting them. My concern is, am I missing something?”

Davis is right to worry. As human resources professional Rick Dacri puts it, “The burden of proof falls on the employer.” He advises businesses to subject their independent contractors to all of the compliance tests, including a 20-point checklist used by the IRS and the state’s “ABC” test. Small businesses in particular often don’t realize they’re in violation of the law, which can be a costly mistake, he says. “They find out, unfortunately, when somebody comes knocking on their door.” Add up penalties and back taxes and benefits, and running afoul of the law just isn’t worth it, Dacri says. He cites a well-known 1998 IRS audit of Microsoft that revealed thousands of misclassified workers, a legal nightmare that eventually cost the company $97 million, much of it resulting from back-paid stock options. “It’s better to make them an employee and be safe than to run the risk,” Dacri says of independent contractors, despite the increased costs.

The issue of worker classification will only heighten in the post-recession labor force, as contingent workers once viewed as a hedge during lean times become a permanent staffing solution for many employers even after their bottom lines recover, Dacri says. (For more on staffing trends, see “For hire,” on page 14.) From the employee’s perspective, that tectonic shift will translate to greater independence and less reliance on an employer to maintain training and keep his or her skill sets up to date, he says. Such trends are already cropping up outside the building trades and technology to include home health care, advertising and payroll, among others. “Some labor laws are slow to recognize the changes we’re having in the workplace,” he says.

“I think we’re going through a very radical change now that’s going to have those kinds of workers in place.”

 

Jackie Farwell, Mainebiz senior writer, can be reached at jfarwell@mainebiz.biz.

 

 

Employee or contractor?

Human resources consultant Rick Dacri says, in most cases, employers can ask themselves three questions to get a handle on a worker’s proper classification. But there’s plenty of gray areas, so use these questions only as a guide:

  1. Does the worker perform services that are part of the company’s bread and butter business? If so, that worker should be considered an employee. For example, a website developer working as an independent contractor at a company that develops websites will likely attract regulators’ attention.
  2. Does the person work under the direction and control of the organization? “I tell you when to come in to work, where to work,” Dacri says. “I provide you with the equipment you use.” That’s an employee.
  3. Is the worker set up as an independent entity? “It would be an LLC or [someone who has] incorporated,” Dacri says. “It’s a person who carries their own liability insurance, it’s an individual who has em—ployees, it’s a person who has an office, though it may be their home office.” Also, independent contractors file separate taxes and typically have other clients.

As part of its outreach efforts on worker misclassification, the state Department of Labor has issued a new guide for employers that explains the law in plain language.

“The law looks at whether it’s a business-to-business relationship or a business-to-worker relationship,” says Adam Fisher, a spokesman for the DOL.

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