Government Intensifying Efforts to Combat Worker Misclassification

Determining whether a worker is an employee or an independent contractor may be a difficult test of federal and state laws. Recently, the Department of Labor, the Internal Revenue Service and certain state agencies have stepped up investigation and enforcement of labor rules concerning the use of independent contractor status. The National Association of Home Builders recently reviewed the rules concerning contractor status to help residential contractors determine whether their business is correctly applying the law.

To push for improved compliance, federal and state agencies have agreed to share information related to this issue. The IRS and DOL announced a joint initiative to improve worker classification compliance in order to:

  • Reduce incidences of worker misclassification
  • Reduce the tax gap
  • Reduce fraudulent filings
  • Reduce abusive employment tax schemes
  • Create educational materials and issue guidance
  • Improve compliance with federal laws
  • Strengthen IRS and DOL relationships
  • Leverage existing resources
  • Send a consistent wage and payroll tax message

A panel of experts assembled by the NAHB noted that the Dept. of Labor (DOL) is targeting certain industries including home builders to boost enforcement. They presented the following quote from a DOL official testifying before Congress regarding the issue:

“[T]he WHD is putting more of its resources into directed, national, regional and local enforcement initiatives and, with a focus on industries with a prevalence of low wage and vulnerable workers, strategically targeting industries when available data and evidence tells us that there are significant levels of non-compliance in those industries.”

» Testimony of Nancy J. Leppink, Deputy Wage and Hour Administrator before the Subcommittee on Workforce Protections of the Committee on Education and the Workforce, U.S. House of Representatives, November 3, 2011

 Examples of changes in the enforcement approach included:

  • More focus on “unannounced ” on-site visits
  • Overbroad documentation requests
  • In some cases, requests are inconsistent with DOL recordkeeping requirements
  • Less flexibility given to employers to produce information
  • Recordkeeping requirements set 72-hour time frame; but not typically utilized by DOL in enforcement history
  • Not permitting “self-audits” after investigation commences
  • Refusal to issue WH-58s when back-pay agreed to
  • More use of Civil Monetary Penalties

On the IRS side, there’s significant statutory and administrative payroll tax relief provided by section 530, section 3509, classification program settlement relief, and a voluntary classification settlement program. The IRS bears the burden of proof in these situations but the “off code” relief is under substantial attack by the current administration, some in Congress, and the IRS.

So why does this matter? What are the risks to misclassification? They include:

  • Benefits-related risks
  • Tax and insurance-related risks
  • Wage and hour-related risks
  • Risk of other liability associated with “employer” status

If independent contractors are actually found to be employees there is potential liability under employment-related laws, including for discrimination, harassment, and wage and hour issues. There’s potential liability for unpaid overtime, vacation, medical leave, and other unpaid wages. The “Wage and Hour” related risks include:

  • Failure to pay applicable minimum wage or overtime under state and federal law (“unlimited exposure” if records do not exist, as recordkeeping is sole responsibility of employer)
    • High-stakes litigations: class actions, double damages, long statute of limitations periods, attorneys’ fees
  • Violation of laws concerning meals, rest breaks, deductions from wages, reimbursement for business expenses
  • Civil and criminal penalties
  • Corporate officers may be individually liable
    • Do you want to be the person who causes a company executive to be individually liable?

In the second part of this article next week, we will take a look at definitions and tests to determine if the law sees someone as an independent contractor vs. an employee. This communication is provided as general information for NAHB/HBA members and it should not be construed as, and does not constitute, legal or professional tax advice on any specific matter.