The ICE’s goal is to reduce illegal employment, protecting employment opportunities for those who are legally eligible to work in the United States.  Employers who receive Notices of Inspection will have three (3) days to prepare for the audit, so all employers should be sure that their records are in order.

The auditors will focus on three areas: 

1. Worker classification.  The IRS will focus on exempt status as well as an employer’s utilization of independent contractors.  Classifying workers incorrectly results in a loss of revenue for the government, in the form of nonpayment of taxes for those incorrectly classified as independent contractors, as well as additional taxes on overtime wages not paid to employees who were misclassified as exempt.
2. Benefits.  The IRS will focus on whether employers properly included taxable benefits in wages.  Since some benefits are taxable, an employer could find itself responsible, for example, for failure to pay taxes on benefits that should have been offered to a worker incorrectly classified as an independent contractor. The government will also scrutinize expense reimbursement practices. 
3. Executive compensation.  The IRS will look at regular compensation, as well as nonqualified deferred compensation structures.

Employers are encouraged to review their workplace procedures and practices.

The class of employees being scrutinized are stockbrokers, financial analysts, traders and similar positions.  The issue is that they are being incorrectly classified as exempt under the administrative and/or highly compensated exemptions.

Under the FLSA, an employee is exempt under the administrative exemption if they are compensated at a rate not less than $455 per week, performs work directly related to the management or operations of the business, and exercises discretion and independent judgment.

A common mistake employers make is with the definition of the highly compensated exemption.  To qualify this exemption an employee’s compensation must be $100,000 or more.  Employers often think this means total compensation, so this would include discretionary bonuses, commissions, etc.  In reality, the compensation must be guaranteed compensation, so these other types of income would not qualify under the highly compensated exemption.

Employers who hire these types of workers should review their compensation structure and job duties, and make adjustment accordingly.

For more information, see FLSA Fact Sheet #17A,

Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA), at http://www.dol.gov/esa/whd/regs/compliance/fairpay/fs17a_overview.pdf.

You should review all visa documentation for your employees and ensure all documentation is complete and accurate in the event your worksite is selected for a visit.

We are already starting to see huge fines and prison time.

1. On July 29, 2009, the owner of an asbestos-removal company based in Queens, New York, was sentenced to 46 months in prison, and ordered to pay $1.6MM in workers’ compensation premiums, for a worker misclassification scheme.  While the owner claimed to have only one employee, a receptionist, he actually used crews of Korean immigrant workers to handle the removal projects.  He also frequently changed the name of his company to avoid detection.  The scheme lasted for a decade.  When he completes his prison sentence, the owner will also most likely be deported, since during this process the Court determined that he was also an illegal immigrant.
2. On August 21, 2009, a California-based company pled guilty and was ordered by a Travis County, TX district court to repay Texas Mutual Insurance Company $200,000 for its part in an insurance scheme.  The Erection Company and its owner admitted to intentionally misrepresenting the number of its employees and its payroll to Texas Mutual.
3. Crime doesn’t pay, and neither does creativity:  On August 14, 2009, a federal grand jury in Las Vegas found a man guilty of 57 counts of fraud and tax evasion.  The owner of several businesses in Las Vegas paid his employees with gold and silver coins and argued that they could pay taxes only on the face value of the coins and not the true market value.  He classified them as independent contractors and paid them with $50 U.S. gold coins.  As a result, their income was less than that required to file taxes, so they didn’t file.  Most employees, however, immediately exchanged the coins for cash at market value, which far exceeded the face value.  Prosecutors said the man paid at least $25MM in untaxed wages to his employees and about $95MM to people who worked in client companies.  The man was released pending sentencing.