UA Partner, Pamela Avraham, spoke at the NJSA Legal Symposium on March 2, 2011 on NJ DOLS audits of staffing firms. Her presentation addressed how to prevent and handle NJ DOL audits. Her is the summary of the presentation
NJ DOL Audits- How to Prevent Them and How to Handle Them

Items which trigger an audit:
1. Employee complains directly to NJ DOL
a. Compensable time for:
i. Waiting at assignment
ii. Answering emails in evening
iii. Training
b. Not paid for claimed hours worked
c. OT
i. Exempt vs Non-Exempt Status
d. Ease of filing complaint
i. Online
ii. Formularios en espaňol
iii. Trabajadores indocumentados
2. Independent contractor files an unemployment claim
3. Corporate tax return indicates unusual items
a. No wages on line for Wage Deductions- only 1099 compensation
b. Employee benefits not proportionate to wage deduction
c. High amounts in consulting expense
4. From information discovered while auditing the clients of a staffing firm
Ways to Prevent Audit
1. Implement system to resolve compensation discrepancies
a. Weigh the cost benefit of “being right” over having a disgruntled employee
2. Supervisor must report any disputes to manager or accounting manager
3. Explain to 1099 contractors all ramifications of 1099 status
4. Review corporate income tax return with CPA
5. Guidelines found in IRS Circular E and Publication 15-A
6. Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes
7. Consult regularly with employment attorney

Requested Documents for Audit
1. Standard list for wage discrepancy audit
2. Standard list for 1099 vs employee dispute
a. Difference between IRS standards vs NJ standards
What Auditors Discover and Determine during the Audit
1. Review of general ledger
a. Payments for 1099 contractors in employee benefits
b. Payments to independent contractors in numerous accounts
i. Repairs and Maintenance
ii. Consulting
iii. Per Diem
iv. Office Cleaning
v. Computer Services
2. Review of cash disbursements
a. “vacation” payments for 1099 contractors
b. Bonuses for 1099 contractors
c. Payments to contractors with number of hours specified
i. Paying OT for more than 40 hours a week
d. Payments to employee classified as 1099
i. The “split employee”- W-2 for one function, usually a 40 hour week, and 1099 treatment for different function- sales, computer work, security
ii. Best of both worlds for employee
iii. Proper classification
iv. Payments made may be subject to OT for non-exempt employee
3. Review of timesheets
a. Don’t agree to payroll records
b. No payment for OT
c. Total hours per week don’t equal sum of all hours worked in week
d. Hours shown as a total per week, hours worked each day are not indicated
4. Review of payroll register
a. Driver deduction
b. Deduction for improper loans
c. Deduction for damages caused by employee
d. Other illegal deductions
e. No payment for OT
f. Bonus based on production – may be subject to OT

5. Review of 1099 vs employee
a. Schedule C of independent contractor- separate company is preferred
b. WC policy of independent contractor
c. Website of independent contractor
d. Business cards, invoices of contractor
e. Set of books and records of contractor
f. Contract or agreement between company and contractor
g. Advertisements of contractor
h. Calculation of payment- based on hours
i. Number of clients of contractor
Potential Exposure
Payments to employees which are improperly classified as independent contractors may subject the employer to the following :
1. NJ Unemployment, penalties and interest
2. NJ withholding tax
3. US employment taxes
a. Social Security Taxes
b. Medicare Taxes
c. Federal income tax withholdings
d. All of the above per IRS Section 3509
4. OT
5. Medical benefits
6. Pension benefits
7. WC issues
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