Class 1 the EE & ER Relationship

The EE & ER Relationship

The EE & ER RelationshipCPP Review class 1

Types of Workers

Common Law EEsIndependent ContractorsStatutory EEsStatutory Non-EEsTemporary Help Agency ReferralsLeased EEs

An EE must be:Subject to dismissalCan quit without liabilityCan participate in the ERs fringe benefit programPerforms service under the companys name

An Independent Contractor must be:Paid through the accounts payable fundProvides unrelated service to the ERSets own hoursWorks for multiple ERsServices are available to the publicPaid by the jobPerform services under a business nameControls the sales process and terms

When WTH for Independent Contractors: Boxes on the 1099-MiscBox 7 : Full amount earned for the calendar year (eg. $1000)

Box 4: The 28% of the full amount that was withheld (eg. $280)

Federal Tax LiabilityFederal Income TaxFUTA (ER only)FICA SS/Med (EE & ER)

Common Law TestBehavioural ControlInstructionsTrainingFinancial ControlReimbursementsInvestmentCompensation (salary vs by the job)Who incurs profit and loss

Reasonable Basis Test/ Safe Harbor Rules for Independent ContractorsJudicial precedent or published rulingsPast IRS Audit Long-standing recognized industry practice25% of industry categorizes workers as independent contractorsER can seek protection under section 530

Form SS-8Definite ruling from the IRS about whether or not a worker is an EE

Statutory EEsWages subject to FICA and FUTA but not FITEEs still responsible for filing FIT

Four Types (FHAT)Full time Insurance Sales AgentsHome workers (FUTA exempt)Agent or Commission DriversTraveling Salesperson

Agreement for worker to perform all servicesCannot make substantial investmentContinuing basis of work/ business relationshipReceive W2 at years end

Statutory Non-EEsEarnings not subject to FIT, FICA or FUTA

Two TypesReal Estate Agents (licensed)Direct Sellers (eg. Avon)

Wages based on service, not hoursResponsible for depositing all taxes like an independent contractor1099-MISC at years end

Temporary Help Agency EEsMay not provide a specialized serviceClient firm does not have final say over hiring and firingEE of agency, not clientTemp agency does payroll and HR functionsClient pays no SUI taxesPaid from accounts payable

Leased EEsOffer a specialized serviceAgency hires, and does payroll and HR functions, but client hires, fires, overseesAgency is ERAgency has lower-priced benefits packagesClient pays agency from accounts payableClient cuts administrative overhead costsClient may need to include EE in benefits packageClient may need to pay SUI taxes

Reciprocity AgreementA reciprocity agreement between neighboring states allows the EEs residence state to withhold SIT

ABC Test

State Wage-Hour Laws use the ABC test to determine State Unemployment Insurance (SUI) eligibility. Absence of control worker is free from control or directionBusiness is unusual and/or away work is performed away from facilitiesCustomarily independent contractor independent trade or occupation

Penalties for MisclassificationNot intentional but filed 1099-MiscER pays 20% of FICAFIT = 1.5 % of wagesNot intentional but failed to file 1099-Misc40% of FICAFIT = 3%Intentional100% of all ER & EE taxesIf EE reported the income, the ER can request 97% abatement of FIT

Wage & Hour PenaltiesRecordkeeping requirements Not paying OT correctlyNot paying minimum wageState unemployment commission penalties

Back TaxesPenalties and Interest for failure to report wagesHigher state unemployment tax ratesPenalties and Interest for failure to pay unemployment tax and loss of the FUTA credit

Consequence to EE of MisclassificationHas no protection under state and federal labor lawsPays a higher FICA (SS/Med) tax rate via the Self-Employment Contributions Act (SECA) 15.3% Not entitled to unemployment compensationMay not be entitled to workers compensation coverage or benefits under the ERs plan

Casual LaborersFIT withholding may not apply if the worker is paid less than $50.00 in any calendar quarter and is not regularly employed for at least 24 days in the quarterWages paid are subject to FICA (SS/Med), and FUTA

IMRCA Immigration Reform & Control Act of 1986Illegal to hire unauthorized workers

ERs can Protect themselves by:Have EEs fill out I9Keep for 3 years from hire dateOr 1 year from terminationPresent to USBCIS when requestedEnsure IDs appear genuine

Form W-7Application of ITINMay be used by independent contractor in lieu of SSN or by non-resident required to report taxable income

Form W-4EEs withholding certificateCompleted by workers who are classified as EEs

FLSAM Minimum WageO OT PayE Equal PayC Child LabourP Public ContractsR Recordkeeping requirements

Covered by State Laws, not FLSA:Require ERs to provide PTO (paid time off) such as: vacations, sick days, jury duty leave, holidays, lunch breaks, or coffee breaks Regulate how often EEs must be paid, or when they must be paid after termination of employment (either voluntary or involuntary)Restrict the hours that EEs over age 16 may be required to work

Wages Paid by PaydateDelaying the payday by one day due to a permanent change in pay cycle (for example, weekly to biweekly) does not violate the FLSA.

Enterprise CoverageAll EEs are covered if:At least two EEs of the business are employed in jobs closely related and directly essential to interstate commerce or the production of goods for interstate commerce. Interstate Commerce is defined as any trade, transportation or communication between one state and another or a foreign country.The business has annual gross sales of at least $500,000.

Certain businesses are specifically covered by the FLSA regardless of annual sales volume:

HospitalsNursing homesElementary and secondary schools and colleges (public or private)Government agencies

CAPES are exempt from the FLSACertain Computer ProfessionalsAdministrativeProfessionalExecutiveSalespeople (specifically outside salespeople)

White Collar ExemptionAffected by:The EEs level of discretionary authorityThe percentage of time spent on exempt activitiesWhether a minimum salary requirement is metEg. Are they able to hire and fire?

Exempt EE: AdministrativePrimary Duties:Office or non-manual workManagement of general business operations of the employer or employers customersWorks directly in academic instruction or training Manages enterprise, department, or department subdivisionOther Job Characteristics:Uses discretion and judgment regularlyAssists owner, executive, administrative employeeMaximum time for non-exempt duties is 20% (40% for retail or service industries)

Exempt EE: Computer ProfessionalSystems analysisProgramming and designComputer programming

Exempt EE: ProfessionalLearned, creative, teachersRequires advanced knowledgeRequires invention, originality or talentInvolves teaching, tutoring, instructing or lecturing by a certified or recognized teacher in the school

Exempt EE: ExecutiveDirects work of 2 or more EEOwns at least 20% equity interest in the enterprise in which he or she is employed, Maximum time for non-exempt activities: 20% (40% for retail or service industries)

Exempt EE: SalespersonsNo salary testCustomarily and regularly engaged away from the employer's place of business while making sales or obtaining orders or contracts for services

OT Pay & the WorkweekThe workweek is 7 consecutive 24-hour periods, or 168 hours. Each workweek stands alone for OT purposes.

Opportunity WagesERs can pay teenagers $4.25 per hour for the first 90 consecutive calendar days after hire OR until the EE reaches age 20; whichever comes first.

Tipped EEERs may pay their tipped EEs $2.13 per hourTake a tip credit of $5.12 per hour as long as:EEs tips bring them up to the current minimum wage; otherwise the ER must make up the difference. EE is informed of tip credit provisions before tip wages are paid.ER does not wait for credit card monies for the EE to receive tips. These are paid by the next payday. Tipped EEs are EEs who regularly receive more than $30.00 a month in tips

Must include the following payments when determining regular rate of pay:Shift differentialsNon-discretionary bonusesPayments other than cashRetroactive PayOn-call PaySupplemental disability payments

Do not include the following payments when determining the regular rate of pay:Paid time off and reimbursed expensesDiscretionary bonusesBenefit plan contributions: ER paid benefitsOvertime CompensationPremium pay for extra days workedPremium pay under a union contract for extra hours

Klinghoffer PrincipleAllows ERs to avoid paying additional compensation to salaried non-exempt EEs for the hours worked between their normally scheduled workweek and 40 hours.ERs are protected provided the regular rate of pay is above minimum wage when the additional hours are accounted for.

Fluctuating WorkweeksThe EE is guaranteed a fixed salary for all hours worked, whether the actual hours worked are more or less than the contracted hours. ER saves money in weeks when the EE works more hours because the regular rate of pay decreases as the hours increase.

Belo-type Constant Wage Plans Belo Plans allow EEs a guaranteed salary for a maximum amount of hours. If the EE exceeds that amount, the ER must compensate for the additional hours at 1.5 the regular rate of pay.

Travel TimeThe rules governing travel time are contained in the Portal-to-Portal Act of 1947.

When Travel is Considered Compensable Work TimeEE at home is called out on an emergency and must travel a substantial distanceSpecial assignment for one day in another city and travels outside the regular workday to get there and backTravel away from home is considered work time only during those periods that coincide with the EEs regular working hours, even if it occurs on a non-working dayTravel as part of job is considered compensable. Travel away from home is considered work time only during those periods that coincide with the EEs regular working hours, even if it occurs on a non-working day.

When Travel is NOT Considered Compensable Work Time:Time spent traveling from home to a railroad station or airport would not be compensableTravel outside regular working hours as a passenger in a plane, train, boat, bus, or car is not hours worked.

Waiting TimeEngaged to be waiting is compensableWaiting to be engaged is not

Meetings & Training Sessions Compensable Time Unless:Held outside of regular working hoursAttendance is voluntaryNot directly related to EEs jobEE does not perform any productive work while attending

Compensable Time:OT unauthorized unless EE specifically told not to workEngaged to be WaitingSleep time (if shift is under 24 hours)Emergency travel

Non-Work/ Non-Compensable Time:Meal breaks (30 minutes or more)Waiting to be engagedSleep time (if shift is greater than 24 hours)

Minors Under Age 18Cannot work if the Wage and Hour Division declared the job hazardous.

Minors Under Ages 14 and 15Minors Age 14 and 15 can work limited number of non-hazardous jobs:RetailFood serviceGasoline service (convenience store)Limited to 3 hours a day and 18 hours a week when school is in sessionThey can only work between 7 am and 7 p.m. (until 9 p.m. June 1st through Labor Day

Minors Under Age 14Generally prohibited unless the minor is working for a parentRestrictions are greatly relaxed for agricultural, entertainment, news carriers, and home workers making Christmas wreathsBatboys/batgirls are exempt from maximum hours as long as work is performed outside of school hours.

Child Labour ViolationsERs face penalties of up to $11,000.00 for each child labor violation.

FLSA Enforcement FLSA is administered and enforced by the Wage and Hour Division of US Department of Labors Employment Standards Administration. EEs can sue for back pay for minimum wage and overtime violations, plus an equal amount in liquidated damages for willful violations.The Statute of Limitations on minimum wage and overtime complaints is 2 years (up to 3 years if the violation was willful).

Walsh-Healy Public Contracts ActThe Walsh-Healy Public Contract Act covers EEs of manufacturers and dealers furnishing the federal government with materials, supplies, and equipment under contracts exceeding $10,000.00.

Contract Work Hours and Safety Standards ActThe Contract Work Hours and Safety Standards Act requires contractors with the federal government (not those already covered by Walsh-Healy or Davis-Beacon) to pay overtime

Compensatory Time OffRelieves having to calculate a premium rate. EEs get 1.5 hours off for every 1-hour of overtime within the same pay period. No good if OT is usually at the end of the pay period.

Gross Wage CalculationsWhen calculating Regular Earnings and the rate of pay is under $7.25, if there is a production bonus, add that first and work out the RRP before deciding if the EE needs to be bumped up to a $7.25 pay rate.