Do you think that employee misclassification -- the scam where corporations claim their employees are "independent contractors" rather than full-time employees, so they don't have to pay for their health, retirement, and other benefits -- is something that only happens to people whose jobs don't involve automatic weapons and Oakley sunglasses?
Think again!
Rep. Henry Waxman, the chair of the House Committee on Oversight and Government Reform, sent a letter to Blackwater USA CEO Erik Prince yesterday alleging that Blackwater has been playing the misclassification game themselves:
I have received documents which suggest that Blackwater may have engaged in significant tax evasion. According to an IRS ruling in March 2007, Blackwater violated federal tax laws by treating an armed guard as an “independent contractor.” The implication of this ruling is that Blackwater may have avoided paying millions of dollars in Social Security, Medicare, unemployment, and related taxes for which it is legally responsible.
Unlike DynCorp and Triple Canopy, the two other major private military contractors providing security services to the State Department in Iraq, Blackwater classifies its armed guards as independent contractors rather than as employees. Under federal tax laws, this classification has important ramifications. Businesses must pay Social Security, Medicare, and unemployment taxes for their employees. They must also withhold federal income taxes on their salaries. By classifying its armed guards and other personnel as independent contractors instead of employees, Blackwater has apparently evaded withholding and paying these taxes.
If true, this would be a serious infraction, not least because Prince was asked about it directly when he appeared before Waxman's committee on Oct. 2 and apparently did not give the whole answer:
When you testified before our Committee on October 2, 2007, Congresswoman [Eleanor Holmes] Norton asked you why Blackwater treats its security personnel as independent contractors, while your competitors treat their guards as employees. You responded that Blackwater treats its guards as contractors because you found “it is a model that works” and because your guards prefer the “flexibility” of an independent contractor relationship.
Since the hearing, I have learned that the IRS determined in March — six months prior to your testimony — that your classification of a security guard working in Afghanistan as an independent contractor was “without merit.”...
There is also evidence that Blackwater has tried to conceal the IRS ruling and the evasion of taxes from Congress and law enforcement officials.
The committee is interested in hearing from any other Blackwater employees who have been misclassified, so if that's you, drop them a line.
UPDATE (Oct. 26, 2007): And now, the deluge... Senators Barack Obama and Richard Durbin have sent a letter to Treasury Secretary Paulson demanding an investigation:
We are writing to ask for a full investigation and audit of Blackwater USA’s practice of classifying many of its personnel as independent contractors instead of employees. As House Oversight Committee Chairman Henry Waxman recently found, Blackwater may have enjoyed an unfair competitive advantage over other contractors if its classification were incorrect, and as a result, may owe the American taxpayer millions of dollars in Social Security, Medicare, and unemployment taxes...
We are concerned that Blackwater may be violating the law by inappropriately classifying its workers as independent contractors. It is difficult to fathom how Blackwater employees in Iraq can be considered independent contractors. They are trained by Blackwater, paid by Blackwater, and told whom to guard by Blackwater. These are not independent small businessmen establishing their own individual working relationships with those they are hired to protect.
Comments (3)
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Your website is interesting to me due to the subject of employee misclassification. I am one of 400 plus insurance agents in the state of my residence whom the IRS has already determined to be misclassified as independent contractors. I have also reviewed the IRS rules and regs governing employers who misclassify, and the miriad of remedies stacked in the employers favor, when a misclassification exists. What is clearly absent, of course, is the IRS view and remedies available to the misclassified employee. Beyond a three year window of potential reimbursement of self-employment tax, nothing else exists, that I can see. Am I wrong?
Posted by Richard Lewis on December 17, 2007 at 9:08 PM
Posted on December 17, 2007 at 9:08 PM
Richard,
Looking only at the Internal Revenue Code and regulations, you are right. You can seek a refund from the government for the employer share of employment taxes you paid, but there’s not much else there to help the misclassified employee. The IRS is mainly concerned about unpaid taxes to the U.S. treasury, not unpaid wages and benefits lost by the employee.
However, the good news is that the federal tax laws aren’t your only source of remedies. Under the Fair Labor Standards Act, if you worked overtime but weren’t paid for overtime, the U.S. Department of Labor (DOL) is supposed to help you recover that compensation plus an additional equal amount as damages. Lost retirement benefits might also be recovered under the Employee Retirement Income Security Act (again, DOL might help).
You don’t say which “state of residence” you are from, but you also may be entitled to remedies under state law. Several states have tightened their laws against misclassification and impose tax liability on the employer for lost unemployment insurance and workers’ compensation premiums, and may provide additional remedies for the worker. You’ll need to check with your state labor agency to see what is available. If your losses from being misclassified are substantial, you (and other agents in the same situation) may want to consider hiring a private employment lawyer, because there’s no guarantee the federal and state agencies mentioned will help individuals recover their losses.
Posted by Debbie Chalfie on December 31, 2007 at 2:20 PM
Posted on December 31, 2007 at 2:20 PM
So whats the story, is blackwater getting off the hook? It appears as though the IRS is chosing to turn its head! Lame but not suprising.
Posted by Cristin on July 22, 2008 at 5:24 PM
Posted on July 22, 2008 at 5:24 PM