U.S. Budget: Labor Department Gets Additional Funds to “Detect and Deter the Misclassification of Workers as Independent Contractors”

The Fiscal Year 2013 Budget was announced by President Obama on Monday, February 13.  It once again includes special funding for the Labor Department to “detect and deter” companies from misclassifying employees as independent contractors.  Specifically, on page 146 of the Budget for the  Labor Department, President Obama commits $14 million for misclassification, including $10 million for grants to States to identify misclassification and recover unpaid taxes, and $4 million for personnel at the Wage and Hour Division of the Labor Department to investigate misclassification.

On the same day, February 13, the Labor Department separately released its 2013 Budget. Misclassification is addressed in the Wage and Hour Division section of the Budget, which allocates its funding toward the hiring of an additional 35 full-time investigators “as part of an initiative to detect and deter the inappropriate misclassification of employees as independent contractors and strengthen and coordinate Federal and State efforts to enforce labor violations arising from misclassification.”

The Wage and Hour Division section of the Labor Department Budget says it will maintain an “increased presence in those industries where the misclassification of employees as independent contractors is prevalent.”  It also observes in its Budget section that “More and more industries are moving to business models in which the beneficiaries of the labor are distanced by multiple layers from the individuals who actually perform the labor.”

To combat what it refers to as “the problem of misclassification,” the Wage and Hour Division notes that it will also seek additional memoranda of understanding with state labor departments and other federal agencies “to increase the coordination and sharing of information between WHD and other stakeholders.”

Observations:

The 2013 Budget for the Labor Department continues the trend of increased funding by the Obama Administration for the federal misclassification initiative.  Additional staffing to “detect and deter” is likely to translate into more investigations of business models that regulators regard as artificial or designed to circumvent the laws affording employees the protections of federal law, such as overtime, union representation, safety, and employee benefits.

Notably, over 70% of the budgeting to curtail misclassification has been dedicated to the States to recover unpaid unemployment and income taxes.  Lately, more and more companies are receiving unemployment inquiries from State Labor Departments about their use of independent contractors as well as  random workforce audits.

Alternative Compliance Solutions:

Businesses that seek to stay ahead of the curve on this issue are taking steps to enhance their independent contractor compliance. Pepper Hamilton’s multi-disciplinary Independent Contractor Compliance practice affords businesses alternative compliance solutions, including restructuring, re-documenting, reclassifying, and redistributing contingent workers. Using IC Diagnostics™ and proprietary tools, such as Pepper’s 48 Factors-Plus analysis and its IC Compliance Scale™, Pepper’s two dozen labor, tax, and employee benefit lawyers in its IC Compliance practice group are able to elevate a company’s level of compliance and minimize or eliminate exposure to varied forms of misclassification liability.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

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