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Township Assessors are Employees!

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Steven H. Lasher
Foster Swift Municipal Law News
September 2009

As many of you know, the Michigan Townships Association (MTA) has issued a Memorandum regarding the employment versus possible independent contractor status of township assessors who are individuals and not entities.

The MTA Memorandum concludes that township assessors must be treated as employees if they are individuals, and can only be treated as "independent contractors" if they are firms hired for purposes of assisting in performing the supervisor’s assessing duties, so long as an appointed certified assessor "signs off" on the tax roll and properly supervises its preparation. It also concludes that if the township supervisor is not a certified assessor, the "assistant" assessor appointed/retained by the township must be a "public employee" because a 1957 Attorney General opinion characterizes appointed assistant assessors that way, and because the assessor "stands in the shoes" of the township supervisor for purposes of signing/certifying the assessment rolls. It does not label the retained assessor as "public officer", because the assessor generally does not appear to take the "oath" required of an officer.

The MTA Memorandum’s conclusion and recommendation that the assessors be treated as employees from this point forward is a reasonable one and is supported by the law. Although arguments can be made for the opposite interpretation, it is our opinion the MTA Memorandum’s conclusion should be implemented. Arguably, the decisions and statutes only require an individual assessor to be an officer or an employee for the single purpose of certifying the assessment rolls. However, taken together, it is difficult to argue against erring on the side of labeling the assessor as an employee, instead of an independent contractor. This is because:

  1. A certified assessor must "approve" the assessment rolls, and therefore is acting with the authority of the township supervisor (who is designated with the power and responsibility to do the assessments) if the township supervisor is not sufficiently certified to do so (MCL 211.10d);
  2. The courts have set forth 5 elements for deciding whether a position is a "public office," and the assessor job appears to satisfy 4 of the five elements, except the "taking of the oath." Pope v Commissioner of Internal Revenue, 138 F.2d 1006 (6th Cir. 1943). Therefore, while not previously deemed an "officer" in a court decision, together with other support, assessors are viewed as meriting at least "public employee" status.
  3. The statutes permitting the appointment of assistant assessors for townships and charter townships (MCL 41.61(1) and MCL 42.11a) make them subordinate to the township supervisors and simultaneously give them the powers and authority of the supervisors for the purposes of assessing property. According to the MTA Memorandum, this necessitates them being employees because "this degree of control" is "sufficient to create the employer/employee relationship" and cannot "be contracted away."
  4. The first Attorney General opinion to address the status of "assistant assessors" after the legislation was passed to authorize their appointment to assist in the supervisor’s performance of assessment duties specifically stated that they were "public employees" as distinguished from "public officers." Attorney General Op. No. 3045 (July 12, 1957). While it did so in the context of determining whether their appointments could be of limited duration, not whether they were employees or independent contractors, the employee label was nevertheless applied.

Additional questions raised:

  1. Can a Township carefully craft an independent contractor agreement to avoid the employee label/finding?

Probably not. It would be possible to craft specific agreements separating out the various duties or roles of the assessors, separating out the clear "certification of the assessment rolls responsibility = employment component" from various other assessor duties that may be done by a firm. But the documents will likely be viewed just as one component in the IRS and/or common law analysis of whether the individual is actually an employee. The 1957 Attorney General opinion, taken at face value, will provide a strong basis for a finding of employee status regardless of what the parties agree. How the agreements are structured (LLC, S Corp) would not likely have much effect on an IRS decision. The IRS and other agencies protecting employee rights tend to find employee status even in the face of clear agreements to the contrary, if they believe the agreements are designed to avoid "employee" status for the worker. So structuring the agreements to ensure that an employee certifies the rolls will comply with the legislative acts and rulings, but is unlikely to satisfy an IRS auditor.

  1. What are the costs to a Township if an employee status is required?

Employee status would provide a basic right to workers’ compensation benefits and unemployment insurance. The circumstances under which a part-time assessor could claim unemployment would depend on what other employers were involved and their contributions, and the assessor’s earnings for purposes of claiming unemployment insurance.

Other employment benefits ("fringe") such as paid vacation time, sick leave (or PTO), health benefits, seniority, etc. can be made dependent on full-time status, or simply the number of part-time hours worked per week. So, an assessor who works 8 hours per week is unlikely to qualify for any benefit plan provided by most employers.

Additional Comments:

  1. The MTA employee status conclusion carries weight because it is based on three different types of opinions:
      • A federal Sixth Circuit court decision regarding what is a "public office" because the IRS deems "public office," holders to be employees (Pope v Commissioner, 138 F.2d 1006 (6th Cir. 1943));
      • A 2001 IRS Chief Counsel Advisory decision opinion that an assessor is an employee. The IRS decision is, however, not binding precedent, and turns on a particular state statute (not Michigan) that defines assessors as "municipal officials," and so assessors are therefore deemed to fit the "public office" holder definition (set out in Pope above); and
      • The referenced Michigan Attorney General decision had the sole purpose of answering the question of whether professional appraisers appointed as assistant assessors can be utilized on a temporary basis. Again, the opinion started from the premise (without clearly saying why) that the assistant assessors are "public employees," distinguishing them from "public officials" in that they don’t meet the 5th component of the "public official" test; "the office must have some permanency and continuity." In other words, the issue of whether they could in fact be designated as independent contractors never came up in the Attorney General decision’s analysis.

Relief from Federal Employment Tax Objection:

If a Township has been classifying assessors as independent contractors rather then employees, Townships could face tax obligations, penalties, and interest for prior years. However, faced with such a demand for the IRS, the Township should have decent responses.

For example, assuming that the Township did, in fact, misclassify Assessors as independent contractors, the Township may avoid the resulting Federal Employment Tax Obligations (such as income tax withholding and FICA obligation), plus penalties and interests, if the Township can prove that the misclassification of the Assessor satisfied the following requirements of Section 530 of the Revenue Act of 1978 ("Section 530"). Note that once a taxpayer makes a case for each of the following elements, the burden shifts to the IRS to rebut the taxpayer’s claims, but only if the taxpayer has fully cooperated with the IRS’s reasonable requests for information.

  1. Consistent Treatment Requirement. For the tax period under review (i.e., a tax year or quarter), the Township must have "treated" its Assessors and all workers who hold a "substantially similar position" as independent contractors for employment tax purposes.
    1. Treatment. Factors to which the IRS will look to determine whether a Township "treated" its Assessors as independent contractors include these: (1) whether the Township ever withheld Federal Employment Tax Obligations from the Assessors’ paychecks; and (2) whether the Township ever filed employment tax returns (i.e., Forms 940, 942, 943, or W-2s) with respect to the Assessors. The Township should have filed Forms 1099-MISC to report Assessors’ income, instead. Other facts and circumstances might be relevant, as well.
    2. Tax Period Under Review. The IRS has held that a taxpayer must satisfy the consistency requirement only for the tax period under review (i.e., the tax year or quarter). For instance, if a Township consistently treated Assessors as independent contractors for 2008 but not for 2007, the IRS is likely to hold that the Township qualifies for Section 530 relief for 2008, even though it cannot for 2007.
    3. Prospective Changes. A Township may prospectively change the manner in which it treats its Assessors (i.e., from independent contractors to employees) without affecting its safe harbor under Section 530 for prior periods. See Section 530(e)(5). Therefore, Townships may "fix" any misclassification without losing their safe harbor.
  2. Consistent Tax Return Requirement. The Township must have filed all information returns consistent with the Assessor’s treatment as an independent contractor. In the IRS’s view, this means that the Township must have timely filed all Forms 1099s and Forms 1096 (a transmittal form) for each Assessor, so a delinquent filing or a failure to file can ruin a Township’s safe harbor.
  3. Reasonable Basis Requirement. The Township must have had a "reasonable basis" for classifying the Assessor as an independent contractor. Section 530 provides that a Township will be treated as having a reasonable basis for treating an individual as an independent contractor if it reasonably relied on any of the following: (A) judicial precedent or IRS rulings; (B) a past IRS audit of the Township; or (C) a long-standing recognized practice of a significant segment of the industry in which the Assessor was engaged. The burden is on the Township to establish that it actually relied on the alleged authority in deciding how to treat workers. If none of the three statutory alternatives are satisfied, a Township may still submit other evidence to prove to the IRS, or the ultimate trier of fact, that a "reasonable basis" existed for the Township’s classification of Assessors as independent contractors. For instance, although less than clear whether the IRS would accept this, a Township may argue that they relied on the advice of their attorney or accountants as to the proper classification of the Assessors and, therefore, had a reasonable basis for classifying the Assessors as independent contractors.

    It appears reasonable that the Townships have a strong argument that the third alternative, the presence of a long-standing recognized practice in the industry of Michigan assessors, provides a reasonable basis for them to have concluded that Michigan Assessors are independent contractors. Additionally, so long as the Townships can establish a prima facie case that it was reasonable not to treat the Assessors as an employee, the IRS would then have the burden of proving that the Township is not entitled to Section 530 relief.

No Relief For Employees

Section 530 provides a safe harbor for the Townships only; it does not provide a safe harbor for the Assessors. Therefore, even if the Townships qualify for Section 530 relief, the Assessors might still suffer tax consequences if the IRS finds that they were, in fact, misclassified by the Townships as independent contractors. For one, the Assessors would still be liable to pay the employee portion of FICA Taxes with respect to the income they earned while misclassified as an independent contractor. Since, however, the Assessors should have paid self-employment tax on such income, which is generally twice the amount of the employee portion of FICA Taxes, the Assessors may consider whether to file a refund claim for their overpaid self-employment taxes, which should offset their FICA Tax liability. Another negative tax consequence to Assessors might be a change in the manner of deduction of their business expenses incurred while acting as an Assessor from Schedule C deductions to itemized deductions.