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Several Agencies Crack Down on Misclassification

July 26, 2010 Written by: Mike Rogers,Chief Compliance Officer

The White House has embarked on a “Misclassification Initiative” designed to improve enforcement of workplace laws, with particular emphasis on employers who wrongly classify employees as independent contractors in an effort to avoid payment of employment taxes, benefits and overtime.

In its 2011 budget, the US Department of Labor includes an additional $25 million devoted to this effort.  In addition, the DOL’s Wage and Hour Division received an additional $12 million and 90 new investigators to expand its enforcement efforts.

The DOL will also reward states that are successful at detecting and prosecuting employers that fail to pay the proper taxes. This pilot program received $10.9 million in funding.  Furthermore, the DOL budget includes $1.6 million to the Office of the Solicitor to enhance enforcement strategies and to promote legislative changes aimed at rectifying the misclassification of employees as independent contractors.

The Internal Revenue Service is in the midst of a similar crackdown.  In February of 2009 the IRS announced the Employment Tax National Research Project (NRP), which will conduct examinations to “collect data that will allow the IRS to understand the compliance characteristics of employment tax filers”.  In February of 2010 the NRP began auditing the first 2,000 firms.  This project is targeted at five key issues: worker classifications, officer compensation, reimbursement expenses, fringe benefits and non-filers.

In addition to these federal initiatives, many states have also begun their own efforts to identify misclassified workers.   Last year Delaware enacted a law specifically targeting the construction industry.   Other states cracking down on misclassification include Maryland, Colorado, Illinois, Indiana, Minnesota, New Hampshire, New Jersey, Rhode Island, and Washington.

Complying with these laws can be confusing, since the tests for determining whether a worker qualifies as an independent contractor vs. an employee differ among government agencies – and individual states may have their own criteria which may or may not conflict with the federal tests.

Companies which use independent contractors should conduct a thorough self-audit to look for any inconsistencies and to prepare for potential audits.