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Vedder Thinking | Articles Lawsuit by Tennis Umpires Underscores Growing Trend of Independent Contractor Claims

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U.S. Open umpires are not giving the United States Tennis Association (USTA) any love. Four umpires filed a class action in the Southern District of New York, alleging that the USTA misclassified them as independent contractors and denied them overtime. The umpires state that their workday often started as early as 7:30 a.m., and that they were required to officiate matches through the night. Additionally, they claim that they were paid a daily rate instead of hourly, based on their certification levels and type of match worked. The umpires argue that they are employees: They cannot negotiate their own salary, cannot work for another company while working at the tournament and do not set their own schedules.

The likelihood that this case will succeed is minimal at best. The umpires work for the USTA three weeks out of the year, meaning that they are outside of the USTA’s control the other 49 weeks. However, this lawsuit is another, very public, example that employee misclassification lawsuits are here to stay.

The US Department of Labor (DOL) and the Internal Revenue Service (IRS) are making this point loud and clear. The two agencies signed a memorandum of understanding on September 19, 2011 to coordinate efforts to stop employers from misclassifying employees. Eleven state agencies—including those in Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington—also signed on. The DOL has agreements from state labor agencies in Hawaii, Illinois, New York and Montana to enter into similar memorandums of understanding. These agreements allow the DOL to share information and coordinate law enforcement with the IRS and participating states.

Depending on the scope of the alleged misclassification, the damages can be large. Spearmint Rhino, a national adult night club, recently settled an employee misclassification lawsuit for $10 million. A class of 11,000 exotic dancers alleged that Spearmint Rhino failed to pay them minimum wage; divided their tips among doormen, DJs and managers; and charged them penalties if they did not sell a minimum amount of drinks during their dancing shifts. California’s penalties can add up to millions of dollars in damages.

The US Open umpires will not be the last group of independent contractors to call “fault.” Employers, especially those in California, must carefully review their policies to ensure that any independent contractors are not improperly classified. 

Looking to Change Your Ways? IRS Offers “Reduced” Tax Liability Programs for Employers Who Voluntarily Change Contractors to Employees

Last September, the IRS launched the Voluntary Classification Settlement Program (VCSP), a program through which employers can resolve issues surrounding the classification of workers as contractors when, in fact, those workers should have been categorized as employees. The VCSP allows eligible employers to reclassify workers currently categorized as contractors to “employees” for future tax periods. Under the program, employers who previously misclassified employees as contractors will face limited tax liability for the past tax treatment of these workers, and will be able to utilize low-cost and streamlined administrative procedures to solve potential classification issues.

In order to be eligible for the VCSP, employers must have treated the worker or workers in question consistently as contractors, and filed Forms 1099 for those workers for at least three years prior to applying to the VCSP. The employer must also not be the focus of a current IRS audit or a DOL or other administrative audit related to its worker classification practices.

An employer need not reclassify all its contractors as part of the VCSP, but all contractors working in the same or largely similar capacity must be reclassified together.

The tax liability under the VCSP for past misclassification is limited to 10 percent of the potential tax liability that would have been due as a result of the misclassification, and the employer will not be required to pay any interest on the penalties. Additionally, the IRS will not subject the employer to an audit of its past employment treatment of the workers in question.

In order to participate in the VCSP, the employer must submit an application to the IRS using Form 8952, which is available at www.irs.gov/pub/irs-pdf/f8952.pdf. Eligibility for the program is not guaranteed to all employers.

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