Labor Pains

Passage of the card check bill is unlikely, but employee classification is picking up steam

Following President Obama’s 2008 electoral victory, labor unions expected their priorities to move to Washington’s center stage. Organized labor’s contributions during the presidential campaign not only helped deliver Obama’s victory, but also helped Democrats boost their majorities in both houses of Congress. It seemed all but certain that labor groups would reap legislative successes.

But with Scott Brown’s (R-MA) unexpected special-election win in January, the Democrats’ margin has dropped below the all-important 60-vote threshold. The willingness of Democrats to take on labor-backed initiatives has waned because of some announced retirements and tough re-election bids that threaten to further erode the Democrats’ majorities in both chambers of Congress.

The business community—including the apartment industry—had prepared for a labor-focused agenda in Washington, but more than a year after Obama’s inauguration, the outlook for labor’s top priorities seems increasingly uncertain.

Organized labor’s priorities

Momentum for the Employee Free Choice Act (EFCA) has slowed to a virtual halt. The business community has succeeded in impeding progress on the bill by making the case that it would compromise employee privacy and impose mandatory arbitration for the benefit of unions, not workers. Passage of the measure, known as the “card check” bill because it would largely replace secret ballots with signed cards in union elections, is highly unlikely because Democrats would be unable to overcome a Republican-led filibuster in the Senate.

But another labor priority—employee classification issues—may prove to be significant for some apartment companies.

The Internal Revenue Service (IRS) recently launched a three-year initiative to assess the prevalence of improperly classified independent contractors that are actually employees. The IRS plans to randomly audit 6,000 companies across industry sectors. Construction firms, however, have been cited as a particular concern by the IRS and the U.S. Department of Labor (DOL).

These initiatives follow a recent Government Accountability Office (GAO) report that found considerable confusion about the two sets of rules established by the DOL and the IRS. The GAO also observed that there are no clearly defined “bright line” tests to determine whether a worker is an employee or a contractor.

Meanwhile, Senator John Kerry (D-MA) and Rep. Jim McDermott (D-WA) have proposed the Taxpayer Responsibility, Accountability and Consistency Act of 2009, which seeks to strengthen classification standards, toughen reporting requirements and raise penalties against employers that intentionally misclassify workers.

The Obama Administration estimates that businesses misclassify 15 percent of their employees as independent contractors. Since businesses are generally obligated to withhold income tax and to pay Medicare, Social Security and unemployment insurance contributions for their employees—but not for independent contractors—worker classifications affect an employer’s tax liability and an individual’s tax obligations. Additionally, an employee is covered by the Family and Medical Leave Act, the Fair Labor Standards Act, anti-discrimination laws, workers’ compensation programs and unemployment benefits. Unions are especially interested in this issue because an employee is eligible to join a union but a contractor is not.

Employers classify workers by considering various factors and tests established by Congress, federal administrative agencies and courts.

Generally speaking, companies that own, manage and develop apartment communities seem to be handling more functions with independent contractors, a development that is evident across industry types for its efficiency. Apartment companies may come to different conclusions about whether to hire independent contractors depending on the firm’s overall strategic vision, corporate culture, and financial resources. At the property level, community-specific elements such as geographic location and property type may also influence such decisions. For example, even some outwardly similar owners may choose to handle property maintenance internally to create a unified corporate culture while others may opt for an outside contractor.

It goes without saying that staffing choices are individualized decisions, but no matter how your company accomplishes essential property management functions or corporate operations, proper classifications are essential.

Apartment firms are encouraged to prepare for possible audits or investigations by taking proactive steps including a self-review of worker classifications and related tax, record-keeping, and reporting obligations, and seeking guidance—especially regarding classifications that aren’t clear-cut—from a legal expert.

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