Labor & Employment Law

The Misclassification "Flu" Is Going Around: Is Your Company Sick?

By Mark E. Tabakman, Esq.

It appears that the U.S. Department of Labor and the Internal Revenue Service are planning to escalate their efforts, i.e. audits/inspections, focusing on (some might say, targeting) employers for their allegedly improper classification of individuals as independent contractors rather than employees. Concomitant to this will be an aggressive and enhanced use of penalties, both to foster compliance and, of equal importance, revenue generation.

The U.S. Government Accountability Office has issued a report, finding that misclassification of individuals as independent contractors is not a per sec violation of the law, but noting that such actions are often linked to violations of the labor and tax laws. With that said, re-classification of individuals to employees means that unemployment contributions have to be paid on them, the same for workers' compensation premiums and, more importantly, overtime has to be paid if they work over forty hours. Independent contractors do not get overtime.

The report chided the Department of Labor for not having its investigators look for evidence of contractor misclassification when they conducted normal wage-hour audits. Although the investigators might have inquired about the 'presence' of independent contractors or discover misclassification issues through worker interviews, they failed to, as a rule,. review employer records evidencing payments to people labeled as 'independent contractors.'

The Wage Hour Division of the USDOL conducted 24,500 Fair Labor Standards Act cases in 2008, but only 131 focused on misclassification. The vast majority of those cases were triggered by employee complaints.

Heightened enforcement is everywhere, spreading like a flu we are all reading about. Proper classification of someone as an independent contractor, a 'true' independent contractor, is often confusing, with many shades of gray. More confusion is engendered by the particular State the employer does business in and the particular law (e.g. unemployment, Title VII, workers' compensation) that is implicated. Self-audits, internal audits focusing on the various factors that are always examined (i.e. control, independently established business) are a very good inoculation against this very expensive flu bug.

Full post as published by Wage & Hour - Development & Highlights on September 16, 2009 (boomark / email).