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Trends in Employment Tax and Employment Law

On Behalf of | Apr 16, 2014 | EDD |

The Intersection of Employment Tax and Employment Law

We are seeing among our business tax clients a rise in wage and hour litigation, either ancillary to, or independent of, their tax issues. In fact, recently I was giving a presentation to a group of business owners regarding this very issue, and one of the attendees told me that his business headquarters had been visited by the Department of Labor, Wage and Hour Division (DOL/WHD) that very day with a demand for records. What we are seeing at the Law Office of Williams and Associates could be coincidental; but, I believe it is the product of both an enhanced enforcement environment at both the federal and state levels, and a highly aggressive labor and employment law plaintiff’s bar. As the former Secretary of Labor, Hilda Solis, said in 2009, “Make no mistake, the DOL is back in the enforcement business.” Solis has since been replaced by Thomas E. Perez, but there is no indication that the DOL is easing its enforcement efforts in the area wage and hour enforcement. The plaintiff’s bar is none the less aggressive, too. In one of our recent cases, an employer who had ostensibly dispensed with one frivolous wage and hour claim was hit with the exact claim by the same plaintiffs, simply going to the next attorney down the street when they didn’t get the answer they wanted. It would appear the plaintiff is hoping for a payout at the end of the preliminary law and motion phase of this meritless action.

It also bears keeping in mind that worker classification issues can trigger, not only employment tax issues, but also wage and hour disputes stemming from issues like hours worked, overtime, and finally, meal and rest period.

The IRS, the DOL, and the various states share information regarding worker classification.

Part of the trend we are seeing an increased employment tax clients with ancillary employment law issues might be due, in part, by this enhanced communication between the IRS, the DOL, and the various state governments.

On September 19, 2011, then IRS Commissioner, Douglas Schulman and then Secretary of Labor, Hilda Solis, signed a Memorandum Of Understanding (MOU) authorizing the sharing of information between the two agencies, in regard to worker classification issues. According to the language of the MOU, the DOL will refer to the IRS information and other data that DOL believes may raise Internal Revenue employment tax compliance issues related to misclassification. The IRS will evaluate referrals provided by the DOL and conduct examinations to determine compliance with employment tax laws. The IRS, in turn, will provide the DOL with data, training materials, and information which may constitute evidence of a violation of any federal criminal law that the DOL enforces. In an equally important statement, the MOU declares that the IRS will “share the employment tax referrals provided by the DOL with the state and municipal taxing agencies.” This last statement should come as no surprise, but what had been perhaps an intuition has been confirmed in the MOU. I.e. that the IRS refers payroll taxes to the states, directly.

California’s Private Attorneys General Act and Unfair Competition Law

Increased use by plaintiffs of California’s Private Attorneys General Act (“PAGA”) (Labor Code Section 2698, et seq.) and Unfair Competition Law (“UCL”) (Business & Professions Code Section 17200, et seq.) could be driving part of the increase in wage and hour disputes that we are seeing at the Law Office of Williams and Associates. The case mentioned above of the attorney-shopping plaintiffs included claims under both the PAGA and the UCL.

The PAGA incentivizes employees and independent contractors to file wage and hour lawsuits. The PAGA created civil penalties and a private right of action to recover those penalties. Before 2004, such actions were required to be brought by the Department of Labor Standards Enforcement or the Office of the California Attorney General. Since 2004 and pursuant to PAGA, plaintiffs may sue on behalf of themselves, or on behalf of any other current or former employees.

Originally passed in 1994, the UCL originally allowed a private claimant to bring a suit on behalf of any “aggrieved” party affected by a business’s “unfair” advantage, the law was amended by 2004’s Proposition 64 to allow monetary award in private enforcement only if the claimant was actually injured by, and suffered financial or property loss because of an unfair business practice. The law does allow for injunctions upon general claims of “unfair business practices.”

Both laws are potential hazards for businesses in regard to wage and hour practices, as well as other employment practices, such as the use of independent contractor labor.

They Have an App for That

On a final note, the DOL has developed its own smartphone application or “app” with which workers can chart their time-worked and contact the DOL Wage and Hour Division. Employers should be concerned as to who is verifying when the user of the “app” is accurately clocking in an out. As an enforcement tool, the “app” has a gimmicky feel about it, and essentially serves as a reminder to workers that the Wage and Hour Division is ready to take any possible complaints. Not a bad thing, if the complaints are legitimate; however, many times they are not.


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