New system for paying officers for off-duty security may run afoul of tax law
23rd September 2013 · 0 Comments
By Charles Maldonado
A newly adopted system changing how New Orleans police officers are paid for off-duty security details may violate federal tax law, according to an IRS ruling cited by tax attorney Bill Neilson.
The IRS flagged a Florida city, which also handles its officers’ off-duty work, for not withholding taxes.
However, the Louisiana State Police now pays state troopers through a similar system, apparently without any legal challenges.
Neilson spoke at Monday’s meeting of the New Orleans Civil Service Commission at the behest of the Fraternal Order of Police, which is trying to undo the city’s new system for coordinating and paying off-duty officers.
The Civil Service Commission approved, on a provisional basis, the system by which officers will be paid for off-duty work through the city payroll system.
The city does not plan to pay Social Security taxes on behalf of hundreds officers for their “paid details,” as they’re called. Those taxes could run into the hundreds of thousands of dollars annually.
But a 1974 ruling by the IRS appears to require the city to make those contributions, Neilson said.
The change is part of a complete overhaul of police details mandated by a sweeping federal consent decree overhauling the New Orleans Police Department. The city is taking the oversight of security details out of police control and placing them under a new City Hall agency, the Office of Police Secondary Employment.
The commission’s approval of the new pay system came over the objections of the Police Association of New Orleans and the Fraternal Order of Police. The latter group, the larger of the two officers’ associations, has filed state and federal lawsuits challenging the system.
Officers Acting As City Employees When Working Off-Duty?
The Social Security tax question hinges on whether officers, when they work security details, are acting as employees of the city or as independent contractors for private clients, Neilson said in an interview. If they are acting as city employees, he said, the city must contribute to Social Security.
And that could cost the city substantially.
The employer contribution for Social Security is 6.2 percent. Patrol officers make $29 per hour for details, according to the pay scale approved by the City Council in August. For a patrol officer working the maximum 24 hours of paid details per week, that could mean more than $2,200 due annually in Social Security contributions.
Moreover, the Fraternal Order of Police contends in its federal lawsuit, if tax law considers the officers employees when they work paid details, they should be paid overtime as required by the Fair Labor Standards Act. In a February letter submitted to U.S. District Court, the Department of Labor says the details should be exempt from overtime.
Neilson referred The Lens to a 1974 revenue ruling by the IRS to make the case that under the new system, paid details are city work. The ruling deals with an unnamed police department whose officers worked an off-duty detail directing bank traffic. The agency determined that the off-duty officers were acting as employees for federal income tax purposes.
The IRS ruling is based on factors similar to New Orleans’ Police Secondary Employment system: centrally controlled pay rates, negotiations and assignments.
At the time, the ruling notes, all state and city employees in the U.S. were exempt from Social Security tax requirements. In 1990, Congress amended tax law to include all state and local employees not covered by an alternative pension plan.
New Orleans police have a pension plan. However, their off-duty pay doesn’t count toward their pensions. That raises this question, Neilson said: Does the new system for coordinating and paying for off-duty work create a new city subsidiary that “does not in and of itself have a retirement system, which would cause the new earnings to be Social Security-taxed?”
City officials did not respond to a request for comment by publication.
IRS Flagged City With Similar System
In 2011, the IRS informed the Port St. Lucie, Fla., Police Department that it could owe seven years of Social Security taxes for off-duty work because the department exercised “complete control over the off-duty detail” system, according to a 2011 report in Scripps Treasure Coast Newspapers.
The IRS has not decided the issue, said Brenda Kellerman, Port St. Lucie Police’s off-duty detail coordinator.
“We’re still waiting on a determination. They have to determine when they are an employee and all that fun stuff,” she said. “They’re still deciphering the information we sent them. It has been a while.”
For now, the officers are considered independent contractors, Kellerman said.
Locally, there is a precedent for the system being implemented in New Orleans. The Louisiana State Police has used a centralized off-duty detail system since 2004. It does not withhold Social Security or pension contributions, and the work does not count toward overtime.
Louisiana State Police Capt. Doug Cain said he doesn’t know of any legal challenge raised to that program.
City Now Phasing In Control Of Off-Duty Work
Officers certainly weren’t acting as city employees before the new system was implemented. Under the old system, which is still active for most details, officers and detail coordinators negotiated their own rates with clients seeking security services — groups ranging from corner stores and restaurants to the Fair Grounds Race Course and the Superdome.
But a 2011 report by the Department of Justice concluded that the system hurt policing. The report found evidence that details were so lucrative that some officers put them ahead of their day jobs, racking up hours every week and even working details when they were clocked in.
“There is evidence that some officers are more committed to their Details than their work for NOPD,” the Justice Department report said. Officers’ groups have repeatedly criticized that conclusion, saying the report didn’t provide evidence. Nevertheless, an overhaul of off-duty work made it into the consent decree, which was signed by U.S. District Court Judge Susie Morgan in January.
The Office of Police Secondary Employment is now starting to deal with clients, assign officers, remove those with disciplinary problems and limit each officer’s off-duty work to 24 hours per week.
And after Monday’s decision by the Civil Service Commission, the office will now accept payments and disburse them to officers in their paychecks, minus a 15 percent administrative fee.
The office began phasing in the takeover of all off-duty jobs last month, beginning with a small detail for neighborhood group Maple Area Residents Inc. The group was initially unable to pay the officers through the city’s payroll system, Chief Administrative Officer Andy Kopplin told Lens partner Fox 8 News in an email, but the problem was fixed by the Civil Service Commission’s vote this week.
The office is supposed to take over off-duty assignments for more than 800 officers by the end of the year. And then, Neilson said, “if you look at that revenue ruling, then I think these people are going to be the employees of the city.”
This article originally published in the September 23, 2013 print edition of The Louisiana Weekly newspaper.