Several days after signing a memorandum of understanding with the Department of Labor allowing the agencies to share information and coordinate enforcement efforts to stop the misclassification of employees as independent contractors, the Internal Revenue Service (IRS) launched an optional settlement program that will enable employers to resolve past worker classification issues. The Voluntary Classification Settlement Program (VCSP) will allow employers the opportunity to reclassify their independent contractors as employees for future tax periods with limited federal employment tax liability for the past misclassification. Employers who are interested in the VCSP must apply for the program and must meet certain eligibility requirements. Employers accepted into the program will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, but the employer will not be liable for any interest or penalties on the liability and will not be subject to a tax audit with respect to misclassification for prior years. Additionally, participating employers must agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the employer has agreed under the VCSP to begin treating the independent contractors as employees.

While the federal tax relief offered under the VCSP may be beneficial, employers should carefully consider the implications for potential liability under various other laws, including the Fair Labor Standards Act and the Employment Retirement Income Security Act.