How the Government is Going After Employee Misclassification

In our special report on Human Resources in the October issue, attorney Joel Greenwald of Greenwald Doherty LLP explains how to protect your company from inadvertently misclassifying employees as independent contractors . Here he tells how government is stepping up enforcement efforts.

If your business has not been meticulous about properly classifying workers as “employees” versus “independent contractors,” you’d better start now. The government wants the taxes and contributions paid on employees. To revenue-starved states, the prospect of increased revenues through enforcement is as irresistible as filet mignon to a starving dog.

Don’t believe that the government’s gunning for businesses that misclassify—or at least may or arguably misclassify—workers? For 2011, the Department of Labor proposes adding another 100 lawyers and investigators, specifically to look for employee misclassification.

Why, at a time of record-breaking deficits, is the government is increasing the DOL budget? Because that’s an investment to the government, not a cost. The expectation is that each dollar spent on tracking down and penalizing misclassifications will yield several dollars of government revenue.

In addition, the DOL is working with the IRS to crack down on misclassification, and both are working with 39 of the 50 states to share information on violations. There is also a real possibility that the agency can start looking elsewhere—such as whether overtime was properly paid.

Bad as things are, they could get worse—much worse. A bill currently in the House, the Employee Misclassification Prevention Act, would increase the already draconian penalties for independent contractor misclassification. Just a few of this bill’s provisions include:

• Making misclassifications a violation of the Fair Labor Standards Act
• Instituting monetary penalties for record-keeping violations
• Creating the legal presumption if an employer keeps inaccurate records, then its worker(s) are employees, not independent contractors—which means that even if an employer is in the right, if its records are bad, it will be in the wrong.

In addition, there’s another bill, the Taxpayer, Responsibility, Accountability, and Consistency (TRAC) Act, which would make it harder to safely designate workers as independent contractors for tax purposes. Higher civil penalties, more easily imposed, and greater tax liability, more difficult to avoid—between these two bills, the cost of noncompliance or misclassification, already high, could go up sharply.