There is no question over the last few years that risk management has been an increasing topic of discussion for boards of directors and the subject of legislative and regulatory actions. A board of directors, along with management, is faced with the task of identifying, assessing and managing risks, whether general to business, industry-specific or unique to the company. Add in an ever-changing landscape of risks on each front and it is a daunting task.
Risks may arise in any area of a company’s operations. As a director, how do you ensure that you aware of possible risks and whether your company may have exposure? There is no single approach. Certainly, you must focus on key aspects of operations. You also want to stay abreast of regulatory trends and developments.
As a risk illustration, we know that a fundamental part of every company is its labor force. So a move this year by the Internal Revenue Service and the Department of Labor to “target” employer misclassification of independent contractors not only presents an enhanced compliance issue for a public company, it also may identify an area for the board’s risk management oversight. As discussed in an Employment Alert from Gardere’s Labor and Employment Team, both agencies are deploying significant new resources to identify misclassifications, prosecute related Fair Labor Standards Act violations and recover lost tax revenues. Additionally, companies are exposed to workers’ claims for financial recovery and future employment benefits.
Public companies, often being larger employers and with more lost revenue potential, may especially be in the crosshairs. This could lead to payment of back taxes and penalties to the government and claims for back pay and benefits from the misclassified workers. Although not recent news, a $97 million settlement by Microsoft in 2000 with “temporary” workers contracted through third parties highlights the exposure of large companies, in this case settling claims of the workers themselves. It started with an IRS audit.
As a director, how well do you know the structure of your company’s labor force? Does your company utilize independent contractors? Is it in compliance with the applicable legal standards? Given the new regulatory focus, has the risk profile increased? This is just one issue in isolation, and these are just some of the questions that a board and individual directors may be asking.
OUR TAKE: Risks may come from different areas and in different forms, and they are constantly changing. Independent contractor misclassification may be just one risk issue in isolation, but it is one of many that management and boards of directors must tackle. Directors must ensure that company-wide and board-level systems are in place in support of risk management, and that they develop their own individual approaches to risk to augment those systems.