New IRS HIRE Act guidance raises questions on layoffs

The IRS recently updated its online FAQs about the payroll tax exemption for new hires under the HIRE Act, and the changes raise new questions for employers, particularly when recalling workers from layoff. An early FAQ, posted on March 20, 2010, states that the payroll tax exemption can apply to an individual who was previously laid off and then “rehired” after 60 days (QE5). It was unclear at the time whether “rehired” was the same as “recalled.”

The latest FAQs indicate that, to qualify for the payroll tax exemption on a recalled employee, the layoff must have actually constituted a termination of the employment relationship, so that the recall is a new (reestablished) beginning of employment (QE17-18, posted July 23, 2010). The IRS says you must look at the particular facts and circumstances to determine whether employment actually ended with the layoff and then renewed upon recall.

As background, the HIRE Act allows an employer to forgo paying Social Security (FICA) taxes on workers’ employment from March 19 through December 31, 2010, provided all of the following are true:

• The worker “begins employment” after February 3, 2010 and before January 1, 2011.
• You have the worker sign an affidavit, under penalty of perjury, that he or she has not been employed for more than 40 hours during the 60-day period before becoming employed with you. (The new FAQs from the IRS state that self-employment doesn’t count toward the 40 hours (QE19).)
• The worker isn’t replacing another employee, unless the prior employee quit or was fired for cause.
• The worker isn’t a relative of the owner.

Tips: Unfortunately, the IRS doesn’t give examples to illustrate whether an employment relationship has been terminated by a layoff and then reestablished by a recall. If you are recalling workers from layoffs of longer than 60 days, we recommend that you take a hard look at how you characterized their employment status during the layoff. In the absence of further guidance, Vigilant suggests the following factors may indicate that a layoff didn’t end the employment relationship for HIRE Act purposes:

• Receipt of employment benefits (other than COBRA) during the layoff.
• Contractual or policy-based right to recall if a position comes open during the layoff, e.g., under a collective bargaining agreement.
• Continuation of seniority for purposes of vacation eligibility upon recall.

We recommend that you also contact your tax adviser for their interpretation of the IRS’s new guidance. Whatever your decision, make a copy of the current IRS FAQs (in case they are altered later) and document your reasoning.