Worker Misclassification Draws Heightened Scrutiny

Federal and state agencies have been stepping up enforcement efforts against employers across a range of industries for improperly classifying employees as independent contractors. Beginning in February, the U.S. Internal Revenue Service will start auditing 6,000 employers through a national research program. Audits will take place over three years.

The IRS uses a 20-factor test to determine worker status. Employers that misclassify workers as independent contractors when they should have been classified as employees can be held liable for a number of federal and state taxes, including income, unemployment, and workers' compensation. Complicating matters for employers, different governmental agencies employ different classification standards. Moreover, the existence of an independent contractor agreement is not, by itself, determinative of a worker's status. Such contracts may be disregarded if the nature of the relationship appears contrary to the written agreement.

At the federal level, there are two pending bills that attempt to regulate employee misclassification. In the U.S. House of Representatives, Rep. Jim McDermott (D-WA) introduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009, which would allow individuals classified as independent contractors to petition the IRS for a determination of the propriety of their classification, significantly increases fines, and strikes the safe harbor provision in the Revenue Act of 1978, which protects employers that classify individuals as independent contractors if certain requirements are met.

Sen. John Kerry (D-MA) recently introduced a similar bill in the Senate that would also effectively repeal the safe harbor provision. Further, it includes a provision that would require employers to demonstrate a "reasonable basis" for applying the independent contractor status or confront employment tax responsibilities.

As the majority of states continue to struggle with decreasing revenues, it is likely that enforcement efforts at the state level will also continue to ramp up. Last month, the Illinois Department of Labor announced that, pursuant to the Illinois Employee Classification Act, it had levied a $328,500 fine against a Chicago contractor after discovering that the contractor had misclassified 18 of its employees as independent contractors.

A handful of states, including Colorado, Maryland, Massachusetts, and New Mexico, have recently enacted laws aimed at employee misclassification in the construction industry. It is anticipated that many states will follow suit and seek to enact employee misclassification laws in 2010.

To access copies of McDermott's bill (HR 3408) and Kerry's bill (S 2882), visit americanstaffing.net. For additional information on worker classification, see the Law & You column "What's in a Name" in the September-October 2007 issue of the ASA magazine Staffing Success.

Article courtesy of Anne Duffy, American Staffing Association

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