Employers Beware: The Department of Labor is Out to Get You

By Rachel Weiss

This is not a threat, it’s a reality. The DOL’s focus has shifted from helping employers comply with the Fair Labor Standards Act (FLSA) to nailing those who do not.

This is also not a secret. In fact, watch for public service announcements in multiple languages featuring the Secretary of Labor and celebrities urging employees to call their hotline if they believe they are being paid unfairly. (See for yourselves at http://www.dol.gov/wecanhelp/psa.htm) Aptly named the “We Can Help” campaign, this initiative was launched just one week after the DOL announced that it is abandoning its practice of publishing Opinion Letters, which historically have provided important guidance to employers. Reliance on DOL Opinion Letters has also served as a defense to liability for back-wages and other damages. Instead, broader “Administrator Interpretations” will be issued that will not address the finer points of particular policies and practices, thereby requiring litigation to determine their application to the facts of each case.

Then there’s the “Plan/Prevent/Protect” initiative, which proposes new regulations that will require employers to audit their pay practices, document how each employee’s exempt status and pay calculations are determined as well as the reasons why certain individuals are categorized as independent contractors and not employees. Employers would need written plans and be required to track how they are implemented. The failure to do all of this to the DOL’s satisfaction will be deemed noncompliance and result in sanctions and/or costly litigation. The pending Employee Misclassification Prevention Act (H.R. 5107, S. 3254) seeks to impose similar obligations.

If you think I’m trying to scare you, you’re right. Most employers also don’t realize that once a violation is established in an FLSA lawsuit, the burden is on the employer to prove why double damages should not be awarded, and the employer will be liable for the employee’s legal fees. Moreover, the owner of the company, or whoever was responsible for the decisions that led to the violation, will be held personally liable along with the company, regardless of laws that limit personal liability in other contexts. Unlike cases brought under Title VII for discrimination, there are no administrative hoops to jump through before employees can go to court. And remember, too, that wage and hour claims are not usually covered by insurance.

Now more than ever, employers need to develop not just a plan for compliance, but a culture of compliance. Consider conducting an internal or external audit of your employee classifications and pay practices, and seek advice from an employment attorney. Wage and hour laws are complex and nuanced, and the DOL clearly is not interested in educating you. If that were the case, it would have created an employer “help desk.” Instead, it beefed up its enforcement staff with 250 new investigators and got famous people to reach out to employees.

Lest there be any misunderstanding, I do not mean to imply that the DOL should not be an advocate for employee rights or that employers should be able to shirk their obligations under the FLSA. Just consider this a public service announcement for the other side.

Rachel Weiss practices labor and employment law with the law firm of Gammage & Burnham in Phoenix. If you have questions about wage and hour issues, you can reach her at (602) 256-4448 or rweiss@gblaw.com.

Update on the New 1099 Reporting Requirements

The Patient Protection and Affordable Care Act included a provision that dramatically changed the 1099 reporting requirements for businesses. Recently Congress passed the 2010 Small Business Jobs Act on September 27, 2010, which further alters the 1099 requirements.

The new law requires that persons/entities receiving rental income from real property to file forms 1099 with the IRS and service providers to reports payments of $600 or more during the year for rental property expenses. This new law takes effect beginning January 1, 2011.

Prior to the Small Business Jobs Act, taxpayers who were not considered active in renting property as a trade or business were exempt from this reporting requirement. Now, all passive investors in rental real estate will be subject to this new requirement.

What happens if you fail to comply? Under audit, all deductions for expenses paid for services: i.e. repairs, landscaping, pool care, etc. may be denied if you fail to issue a 1099 to the service provider.

What does this mean to you?

a. It means that you will need to track your payments by Vendor as well as by Expense Category, beginning next year.

b. You will need to gather address and Taxpayer Identification Numbers for all of your vendors.

c. You will need to issue 1099’s to your vendors by January 31, 2012 for 2011 and you will need to file a copy of those 1099’s with the IRS, along with Form 1096 by February 28, 2012, for 2011.

The Small Business Jobs Act also accelerated the start date for 1099 reporting to Corporations to become effective 1/1/2011 (rather than 1/1/2012, under the 2012 Health Care & Reconciliation Acts enacted back in March 2010). Prior to these law changes, payments to Corporations were exempt from 1099 reporting. If you contracted with a company that was a Corporation (i.e. Inc. or Corp. at the end of the name), then you did not have to track and report payments of $600 or more to these entities. Now, under the new laws, you must report to Corporations as well as all other entities.

How to Plan when the Future of Tax Rates is Uncertain

It’s October and the fate of the Bush tax cuts is still uncertain. Due to the Midterm Elections, the vote regarding the tax cuts has been placed on the back burner, which makes year-end tax planning nearly impossible. If Congress does not vote to extend the tax cuts, rates for the high income brackets would return to the rates in 2001. The 33% bracket would rise to the 36% and 35% would rise to 39.6%. The 10% bracket would be eliminated completely. Some pundits are predicting that Congress will extend the Bush tax cuts for another two years. However, there is a chance that a filibuster could thwart any tax changes and the tax cuts might expire for everyone. With all that said, you are probably asking, “So how am I supposed to plan?”

In order to approach the unknown future of the tax cuts, you do not have to plan three different strategies (Pre-Bush tax cuts, status quo, and Obama’s Proposals). There are ways to approach this conundrum efficiently and economically.

· Accelerate income into 2010. This approach does seem contrary to conventional wisdom, but due to the uncertain climate, you will benefit at the lower tax rates.

· Consider selling open unrealized-gain positions. If you accelerate a gain transaction on an asset you believe to have strong market-value, you will avoid future taxation on the increased basis and will qualify for a lower tax rate.

· Wait. If you wait to play it safe, look for strategies that can be reclassified after year-end.

· Roth IRA Conversions. As of 2010, all taxpayers may convert their retirement plans to a ROTH IRA. You can take the Roth converted amounts into 2010 income or defer it to 2011 and 2012. Additionally, if you feel the Roth IRA does not suit you, you do have a second chance and can undo the Roth conversion until October 15, 2011, which is unprecedented. However, in order to qualify for this tax break, you must convert before year-end. The decision to convert to a Roth IRA is complex so contact us if you need assistance.

It may seem concerning to you to base your tax planning around speculation. However, there are strategies to approach this very unusual year-end situation. Contact our office today to schedule appointments regarding your tax projections.