The IRS’ Voluntary Classification Settlement Program: Maybe Not Such A “Fresh” Start After All
In September 2011, the IRS announced a new Voluntary Classification Settlement Program ("VCSP") under which eligible employers can voluntarily reclassify workers who were formerly treated as independent contractors to "employees" and, in exchange, obtain significant relief from potential employment tax liability for past periods (including penalties and interest). Specifically, eligible employers would only be required to pay 10 percent of the employment tax liability that would otherwise be due on compensation paid to workers in the most recent year. Employers, however, must agree to reclassify these workers going forward. Also, for the first three years after the reclassification, employers must agree to a special six-year limitations period on assessment of employment taxes, rather than the three-year limitations period that would otherwise apply.
Although the IRS touts the program as a potential "fresh start" for employers, employers should be aware of the significant risks in reclassifying independent contractors as employees under the program, including (i) the potential economic impact for future state and federal employment taxes, (ii) exposure to litigation, including potential class actions by reclassified employees, and (iii) the possibility that the IRS could share information with the Department of Labor or other federal and state agencies.
Because of the risks involved, taking advantage of the VCSP may be the wrong move for many employers. Nevertheless, there may be circumstances where the positives outweigh the negatives. For more information and advice on whether your business should participate, contact a member of the Troutman Sanders LLP Labor & Employment group.