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Disguised employment crackdown launched in USA – will OTS or HMRC take tips from IRS?

A disguised employment crackdown in the USA will see state governments given $25m (£16m) of federal funding to conduct random audits of 6,000 businesses over the next three years. This is part of a drive by the US Internal Revenue Service (IRS) to curb what it describes as ‘worker misclassification’, or what the UK’s tax authorities describe as ‘disguised employment’.

In contrast to IR35 rules in the UK, existing US legislation holds the employer, and not the worker, responsible for misclassification of disguised employment. Employers found guilty of this are liable for unpaid income and employment taxes, unemployment insurances and social security.

New US legislation in the form of the Employee Misclassification Prevention Act 2010 is being considered that could further penalise employers, with fines of up to $5,000 for each misclassified worker. Another potential new piece of legislation, the Fair Playing Field Act 2010, would require client organisations hiring contractors to provide written confirmation of each contractor’s tax obligations.

But while UK contractors might be cheered at the thought that clients could take on the burden of responsibility, seasoned contracting experts fear that if HMRC were to take tips from the IRS, it could make matters worse.

“With the Office of Tax Simplification (OTS) currently reviewing the future of IR35, it is to be hoped that the UK won’t go down the route of punishing clients with fines and additional administration,” warns ContractorCalculator CEO Dave Chaplin. “Further regulation would put a tremendous burden on employers at a time when we need to be clearing the path for clients to use the flexible workforce to help grow the economy.”

Disguised employment is seen as a serious issue in the US. According to a report by US staffing agency Staff Management, US Department of Labor statistics suggest that misclassification of workers affects over 30% of US employers, and as many as 3.4m workers could be misclassified as contractors when they should be employees.

Published: 13 January 2011

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