NEW JERSEY DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT by gabyion

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									NEW JERSEY DEPARTMENT OF LABOR AND
      WORKFORCE DEVELOPMENT

                      New Jersey’s Approach to
                     Worker Misclassification and
                        The Cash Economy

                                             Presented to



          2007 National UI Directors Conference
                             October 22 – October 26, 2007
                                Nashua, New Hampshire


   New Jersey Department of Labor and Workforce Development
N J LWD
Division of Employer Accounts
Audits and Field Services




    In New Jersey, our Audits and Field
    Investigations Section is especially
    concerned with workers being
    involuntarily disenfranchised from
    unemployment and disability benefits
    because an employer decides to
    deliberately misclassify the worker as an
    independent contractor
N J LWD
Division of Employer Accounts
Audits and Field Services

We do not believe that worker misclassification is a benign issue

Misclassification denies the worker and his or her family a very
    important benefit, income replacement and usually at a time
    when most needed

Misclassification gives the dishonest business an unfair advantage
    over the honest business man

Misclassification causes the honest business person to consider
    cheating to stay competitive or possibly go out of business

If cheating is not addressed, not only does it continue, but it
     expands
N J LWD
Division of Employer Accounts
Audits and Field Services


          New Jersey’s Audit Program


 “This is not your father’s Oldsmobile”
N J LWD
Division of Employer Accounts
Audits and Field Services

          Reasons for misclassification
                        (in the good old days)



   Economic considerations – employer and worker save
   Convenience – no forms to fill out
   Industry practice – everyone does it
   Gain a competitive edge
   Not strictly enforced on the federal level
N J LWD
Division of Employer Accounts
Audits and Field Services

   Today there seems to be a blinding
   concern for the “bottom line”
And add to this an expanding pool of vulnerable workers, maybe
   undocumented workers, maybe lacking technical skills, maybe
   not fluent in the language

Mix in a group of employers willing to take advantage and we have
    a recipe for an enforcement disaster
N J LWD
Division of Employer Accounts
Audits and Field Services


              Develop a new audit approach

  In many cases it is no longer realistic to believe that books and
     records accurately reflect business activities
  Yes, we are mandated by USDOL to obtain an audit penetration
     rate and yes finding a whole bunch of folks operating under
     the radar for years, can impact other DLA Goals
  Consider the IRS estimate of a $295 Billion Tax Gap
  Misclassification and non compliance are growing
  Need to address the expanding cash or underground economy
  What’s important - maximize return per audit or maximize the
     number of cases that are completed
N J LWD
Division of Employer Accounts
Audits and Field Services

             Designing new audit programs

We have to focus our attention beyond the registered employers

Our plan is to find those employers who are not part of the system
We have identified:
                         Dry wall crew leaders
                         Landscape contractors
                Clients of employee leasing companies
                               Nail salons
       1099 audit with a focus on non-registered employers
                           Main Street Project
N J LWD
Division of Employer Accounts
Audits and Field Services

                           Crew Leaders

Started in agricultural industry
Expanded to food processing plants and light manufacturing
And now very common with drywall contractors

Crew leader is alleged by a contractor to be the employer of a
   crew, all payments made to the crew leader who converts a
   check to cash

Crew leaders have no business location, no business phone, no
   business registrations and are not paying taxes
N J LWD
Division of Employer Accounts
Audits and Field Services

From a single audit and in one calendar year we found
   one contractor paying “crew leaders” as follows:

Crew   leader   1               $ 3,356,051
Crew   leader   2                 1,962,588
Crew   leader   3                 3,503,103
Crew   leader   4                 7,781,395

    total                       $ 16,603,137
N J LWD
Division of Employer Accounts
Audits and Field Services


Total wages reported by the “crew
  leaders” for New Jersey
  Unemployment and Disability
  Insurance


                  $0
N J LWD
Division of Employer Accounts
Audits and Field Services

                          Our response

Investigated each crew leader

Determined that none were actually in business but were
   really the agent of the contractor

Held the contractor responsible for the taxes related to
   payments that went to the crew leaders
N J LWD
Division of Employer Accounts
Audits and Field Services

                Landscape contractors – day laborers

A very innocent beginning, started with a citizen complaint



First year results seem modest, but consider only two
          investigators assigned on a part time basis

We found: 56 contractors owed $129,139 in taxes
          failing to report an estimated $2.8 million in wages
N J LWD
Division of Employer Accounts
Audits and Field Services

              Landscape Contractors – Day Laborers

This project to date, keeping in mind done on a part time basis
     with a limited number of staff, found:

62% of investigations found a failure to report or accurately report
    payroll

675 contractors failed to report $ 74.2 million in wages

Owing an additional $3.3 million in unemployment and disability
    taxes
N J LWD
Division of Employer Accounts
Audits and Field Services

                       Employee Leasing Clients

In New Jersey, by statute the employee leasing company is
     recognized as the employer of the client’s employees

The client is recorded as inactive in our employer database and
     becomes almost invisible in terms of audit or investigation

                                     BUT
Client still operates, client still has a check book, still files tax
     returns, still makes business decisions independent of the
     leasing company

About 40% of audits have a change, SO
N J LWD
Division of Employer Accounts
Audits and Field Services

           Employee Leasing Clients
                      We expected to find:
About 40% of leasing clients would have additional unreported
   wages

                             We found:
60% of our investigations disclosed additional taxes due
(227/376)

Discovered unreported wages of $25 million, additional taxes of
    $876,043
N J LWD
Division of Employer Accounts
Audits and Field Services

                            Nail salons

 Started this project in August 2006

Investigated 433 business, 294 owed additional taxes -68%

Unreported wages          $4,541,774

Additional taxes            $213,997
N J LWD
Division of Employer Accounts
Audits and Field Services

                    1099 Investigations

We filter out exempt employers, e.g.real estate companies

We identify individuals receiving only ONE form 1099

We sort by FEIN

We identify businesses that are registered and we further
    identify businesses that are not registered employers
N J LWD
Division of Employer Accounts
Audits and Field Services

                    1099 Investigations

77% of investigations have additional taxes owed (89/116)

We have discovered $ 29.9 million in unreported wages

                            AND

We collected $ 2,007,501 in additional taxes owed
NJDOLWD
Division of Employer Accounts
Audits and Field Services

                      Main Street Project

Started in July of this year, and results not yet quantifiable

Preliminarily, the staff reports finding non registered
    employers in 10% of businesses visited

Preliminarily, there seems to be a high incidence of workers
    on location versus the number of workers reported
N J LWD
Division of Employer Accounts
Audits and Field Services

FACTORS THAT ARE HELPING US ADDRESS THESE ISSUES
Our Governor recognizes the consequences of an unchecked cash
    economy and erroneous worker classifications and has directed
    the Department of Labor and the Department of the Treasury
    to work together to address these issues

The Commissioner of the Department of Labor and Workforce
    Development is a strong advocate for addressing worker
    misclassifications and the cash economy

Our legislature has enacted laws that both acknowledge the
    importance of accurate worker classification while providing
    tools to help enforcement
N J LWD
Division of Employer Accounts
Audits and Field Services


Legislation has been passed that creates a shared definition of individuals
     subject to unemployment coverage and gross income tax withholding

Legislation has been passed that criminalizes worker misclassifications in the
     construction industry and provides for debarring contractors from doing
     public contract work when there is a pattern of worker misclassifications

We are breaking down the “silos” of government, we are working to leverage
    resources and because of the shared definition between unemployment
    coverage and gross income tax withholding we can share audit findings
    between departments

Unemployment tax violators are generally violating our Workers’
   Compensation Laws, and our audits are shared with Workers’ Comp

Questionable Employment Tax Practices      QETP

								
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