Proposed Federal Law Creates New Risks & Penalties for Employers Who Improperly Classify Employees as Independent Contractors

Earlier this year, we reported that the Obama Administration's proposed 2011 budget included millions of dollars for a "misclassification" initiative spearheaded by the Department of Labor (DOL). Now, DOL has received its money, hired additional lawyers and investigators, and is actively targeting companies and industries suspected of improperly treating workers as independent contractors (rather than employees). Just this week, Congress indicated its intent to give DOL another weapon by introducing legislation that would treat worker misclassification as an independent crime with independent penalties, including treble damages.

Under the proposed Employee Misclassification Protection Act (EMPA) (H.R. 5107 and S. 3254), the Fair Labor Standards Act (FLSA) would be amended to required targeted DOL audits in industries where employers frequently misclassify workers. In addition, EMPA would require employers to:

• Keep records of hours worked by independent contractors, similar to those currently required for employees;
• Notify workers of their independent contractor or employee status and provide them with information on how to file a complaint with DOL via a dedicated Web site or otherwise if they think they have been misclassified;
• Pay civil penalties for misclassification of employees as independent contractors (up to $1,100 per employee for first offenders; $5,000 per employee for repeat or willful violations); and
• Pay treble damages for willful violations of minimum wage or overtime laws resulting from worker misclassification.

EMPA would also strengthen inter-agency communication and enforcement efforts by allowing DOL and the Internal Revenue Service to share information regarding misclassification cases and requiring state unemployment insurance agencies to conduct audits to identify employers who are misclassifying employees. The bill also includes provisions penalizing employers for paying unreported wages to contractors (who really should be treated as employees) for unemployment compensation purposes.

In addition to EMPA, the Taxpayer Responsibility, Accountability and Consistency (TRAC) Act introduced in 2009 would limit the availability of existing tax law "safe harbor" provisions currently relied on by businesses to designate workers as independent contractors for federal employment tax purposes.

New Weapon, Old Fight

DOL and other agencies have long sought to curtail the practice of treating workers as independent contractors when they actually meet the legal definition of employees. These government bodies recognize that misclassification keeps tax money out of their coffers and also denies workers various protections the laws provide to employees. However, different laws, courts and agencies use different definitions and tests for the term "employee," and EMPA makes no effort to harmonize those different standards. Even if a business escapes DOL scrutiny – and whether or not EMPA is enacted into law – employers still have an incentive to get their worker classifications right to avoid audits and fines from the IRS (a particularly active agency in this regard), state workers' compensation agencies and unemployment departments, as well as individual employee lawsuits. Of course, EMPA dramatically increases employer exposure by requiring employers to "report on themselves" both to DOL and employees and by strengthening inter-agency information sharing so that multiple arms of government can investigate and prosecute simultaneously.