Independent Contractor Classification – Why Bother?


Oregon employers have another reason to pay attention to federal and state government initiatives to crack down on misclassified independent contractors. As will be discussed, a recent IRS initiative to secure employers’ voluntary compliance with independent contractor law is just the latest in a string of recent and highly publicized government initiatives to stop employer misclassification of its workers.

In September 2011, the IRS announced that the launch of the Voluntary Classification Settlement Program. Under the VCSP, employers who have consistently misclassified workers as independent contractors would have an opportunity to correct their past misclassification mistakes “without waiting for an IRS audit,” according to an IRS press release.

Specifically, the employer would be required to apply for the program via a Form 8952 and agree to make a payment that equals slightly more than one percent of the wages paid to the reclassified worker in the past year, without interest or penalties. To be eligible, the employer must meet certain requirements, including having engaged in the misclassification consistently, and having filed Form 1099s for the past three years. (For more information, and for a copy of the Form 8952, see the IRS’ website:

Although voluntary participation in the VCSP could alleviate any concerns employers have about a “surprise” IRS audit occurring with respect to some of its misclassified workers, and minimize the financial exposure that can result from getting “caught” with a misclassified worker, Oregon employers should not agree to the VCSP without first giving serious thought to the potential consequences of doing so. For example:

(1) Participation in the VCSP means that the employer will have a new statute of limitations for payroll taxes, described in an IRS press release as a “special” six-year statute of limitations.

(2)  The scope of the VCSP is limited: Amnesty applies to the worker(s) covered under the employer’s application only, and only under those laws within the IRS’ purview. Thus, other federal and state government agencies with classification compliance enforcement (such as the U.S. Department of Labor, the Oregon Department of Employment or the Oregon Bureau of Labor and Industries) may engage in enforcement or audit actions of their own, particularly if they use a different test for independent contractor classification than the IRS (such as BOLI).

(3) Employers who voluntarily participate in the VCSP must change their misclassification practice immediately. That means the employer must, going forward, pay the income taxes and unemployment benefits for the previously misclassified worker and ensure compliance with federal and state wage and hour and anti-discrimination laws that independent contractors are not subject to (discussed below).

(4) The consequences to an employer who applies for VCSP protection, but is rejected, is unclear. Would it expose the employer to the very IRS audit the VCSP program is designed to avoid?  Would the employer undergo multiple agency enforcement actions or audits?

Other Notable Government Initiatives. In November 2007, the IRS announced that it had entered into the “Questionable Employment Tax Practices” initiative with various state workforce agencies ( Oregon ’s Department of Employment joined the QETP initiative in July 2008). The IRS, its partnering states, and the U.S. Department of Labor are just some of the collaborating partners in the QETP initiative, which allows participating states to exchange audit reports and associated case information, audit plans, best practices, training and outreach and education with the IRS regarding employment tax schemes or practices that have no objective other than to avoid federal and/or state employment taxes, including employers who misclassify independent contractors.

Intergovernmental cooperation took a new twist in September 2011 when the DOL and the IRS that they had entered into a Memorandum of Understanding to “improve department efforts to end the business practice of misclassifying employees in order to avoid providing employment protections.”  The DOL also announced that it had reached similar agreements with several state agencies, although BOLI has not yet entered into a similar agreement with the IRS.  

Independent Contractor Classification – Why Bother?  Employers have many financial incentives to properly classify a worker as an independent contractor. First, independent contractors are not subject to federal and state wage and hour laws (including overtime requirements), and most are not protected by federal or state anti-discrimination or leave laws. Second, the wages paid to properly classified independent contractors are not subject to withholding for federal, state, or local taxes. Employers are not responsible for paying workers’ compensation and unemployment insurance premiums. Unfortunately, misclassification can also result in significant financial consequences, particularly when an employer with a history of misclassification becomes liable for back payments of the benefits/taxes identified above. Such payments typically come with penalties, interest and the like.

In next month’s column, I will address some common independent misclassification errors and describe steps Oregon employers can take to help ensure compliance with applicable laws.

Tamara E. Russell, an attorney at Barran Liebman LLP, has successfully represented employers and companies in government agency audits regarding independent contractor classification issues. Her practice focuses exclusively on the rights of management and employers in the world of private- and public-sector employment law. You can reach her at or 503-276-2182.


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Founded in 1994 by the late Pamela Hulse Andrews, Cascade Business News (CBN) became Central Oregon’s premier business publication. •

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