Companies that wrongly pay workers as independent contractors, rather than employees, strip workers of benefits and protections and put responsible employers at a competitive disadvantage, according to Rep. Lynn Woolsey, D-Calif., who this week proposed increasing penalties on employers found to have misclassified workers.
Woolsey’s bill, The Misclassification Prevention Act, (HR 3178) is the most recent in a series of Democratic efforts to clamp down on employers who deliberately misclassify workers in order to avoid overtime pay requirements and employment taxes.
The Internal Revenue Service (IRS) estimates that misclassification by U.S. employers shortchanges taxpayers by nearly $3 billion in revenue annually. The U.S. Department of Labor (DOL) estimates that up to 30 percent of companies misclassify employees.
Businesses claim that the estimates are overstated and that companies fall out of compliance because existing laws are confusing and difficult to follow—not because they are cheats.
Woolsey’s proposal is not expected to gain traction in the Republican-led House. But some of its provisions are mirrored in federal agency enforcement initiatives and in actions being taken up by states. Earlier this year, the IRS and DOL resolved a long-standing dispute about the sharing of confidential taxpayer information and agreed to begin working more closely to identify misclassifiers. Meanwhile DOL is seeking additional funding for an additional 107 worker classification investigators and plans to complete an additional 3,250 audits.
Among the key provisions of Woolsey’s bill:
- A requirement that employers keep records reflecting the accurate status of each worker as an employee or non-employee and clarify that employers violate the Fair Labor Standards Act when they misclassify workers;
- An increase in penalties on employers who misclassify their employees and are found to have violated employees’ overtime or minimum wage rights; and
- A requirement that employers notify workers of their classification as an employee or non- employee.
In addition, states would be required to conduct audits to identify employers that misclassify workers and strengthen their own
penalties for worker misclassification.