Feds Team Up With States to Increase Heat on Employee Misclassification

Using independent contractors is a way to avoid paying unemployment, Social Security and Medicare taxes, overtime and  benefits. However, if an employer is found liable of misclassifying an employee in tandem with committing wage and hour violations, DOL may fine the employer, and the employer may be assessed back wages and taxes.

The U.S. Department of Labor (DOL) two days ago signed a memo of understanding with labor commissioners from seven states — Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington — to “improve departmental efforts to end the business practice of misclassifying employees in order to avoid providing employment protections.” The DOL Wage and Hour Division, Employee Benefits Security Administration, Occupational Safety and Health Administration and other agencies will pitch in.

DOL says in a press release: "Business models that attempt to change, obscure or eliminate the employment relationship are not inherently illegal, unless they are used to evade compliance with federal labor laws – for example, if an employee is misclassified as an independent contractor and subsequently denied rights and benefits to which he or she is entitled under the law.”

So it’s more important than ever to properly classify employees, thereby avoiding trouble. To do that, reference the IRS website "Independent Contractor or Employee” and Publication 1779, which focuses on three key factors: Behavioral Control, Financial Control and the Intent of the Parties.

Supplemental guidance is provided in IRS Publication 15A,  page 6, which addresses “Who Are Employees?”

The focal point in deciding whether an individual is an employee is whether the individual is economically dependent on the business to which he renders service or is, as a matter of economic fact, in business for himself, according to human resources consultant Christine Walters. She says the courts generally focus on five factors:

1. the degree of control exerted by the alleged employer over the worker.
2. the worker’s opportunity for profit or loss.
3. the worker’s investment in the business.
4. the permanence of the working relationship.
5. the degree of skill required to perform the work.

Rep. Lynn Woolsey (D-Calif.) said in a recent U.S. House Subcommittee on Workforce Protections that DOL needs tougher enforcement of misclassification rules. Woolsey suggested that 10 million workers, or 7.4 percent of the workforce, are misclassified as independent contractors and thus vulnerable to FLSA minimum wage and overtime violations.

Sen. Sherrod Brown (D-Ohio) introduced a bill in April that would increase enforcement on employers that misclassify workers as independent contractors.