Government Sets Sights on Employee Misclassification

May 22, 2012, 8:30 AM

The idea that some businesses misuse the "independent contractor" label is not new. Indeed, the "independent contractor" costs less by avoiding certain state and federal taxes and is not subject to the protections of laws such as the Fair Labor Standards Act, the Family and Medical Leave Act, and state unemployment laws, among others. For these reasons, businesses have been misusing the label for years.

In fact, the U.S. Department of Labor estimates that up to 30 percent of businesses misclassify their workers. According to the Obama administration, these misclassifications cost the federal government billions in lost employment tax revenue each year. Not surprisingly, there are significant efforts to increase enforcement and capture that revenue. One such mechanism is the Federal Misclassification Initiative, which provides for the hiring and training of additional government investigators tasked with identifying organizations that misclassify workers.

Pursuant to this Initiative, the Department of Labor has entered into a Memorandum of Understanding ("MOU") with the Internal Revenue Service, whereby "the agencies will work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws." The DOL is in the process of expanding its information-sharing and enforcement efforts by entering into similar MOU's with thirteen states (the DOL is "actively pursuing MOU's with additional states as well").

These enforcement mechanisms will serve to increase the risk associated with misclassifying workers. Not only will the chances of being caught increase, but the cost of being caught has also gone up, as multiple government agencies may be involved in any enforcement process. As such, it is increasingly important that businesses understand the risk of misclassifying workers and carefully review their relevant policies and procedures. --David J. Sullivan