Buried in the Federal Register on January 11, 2013 is a proposal for the U.S. Department of Labor to conduct a study to “better understand employees’ experience with worker misclassification” by “measur[ing] workers’ knowledge about their current job classification, and their knowledge about the rights and benefits associated with their job status.”

The proposed study defines worker misclassification as “the practice, intended or unintended, of improperly treating a worker who is an ‘employee’ under the applicable law as [being] in a work status other than an employee (i.e., an independent contractor).”

The Department of Labor is soliciting comments concerning its proposal to collect this information. The study is budgeted to conduct extended interviews with 10,060 workers. In contrast, the study will survey only 100 “executives” and conduct in-depth interviews with only 20 of them.

This worker classification study is part of the continuing focus by the U.S. Department of Labor to crack down on independent contractor (IC) misclassification, which (according to the proposal) allows employers who misclassify workers “to achieve significant administrative and labor cost reductions, giving them a profound advantage over employers that properly classify their workers as employees.”

The Department of Labor’s proposal also notes that misclassification results in a loss in overall unemployment insurance revenue due to underreporting of at least $200 million dollars annually, as well as unpaid revenues to the federal government of more than $2.7 billion dollars per year in unpaid Social Security, unemployment insurance, and income tax.  The proposal notes that a study conducted for the Labor Department in 2000 found that 10 to 30 percent of businesses audited for state unemployment insurance had one or more of its employees misclassified as independent contractors, and that, since 2009, Wage and Hour investigators have collected over $29 million in back wages for over 29,000 employees who were not paid in compliance with federal law because they were misclassified as independent contractors.

Comments to the Labor Department’s proposed survey may be submitted by interested members of the public or by counsel on their behalf by March 12, 2013.  Comments are being sought on whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; the validity of the methodology and assumptions used; and the quality, utility, and clarity of the information to be collected.  The publisher of this blog post can assist those interested in registering their comments on the proposed study.

Analysis:

This proposed study is the latest in a series of crackdowns by the U.S. Department of Labor on IC misclassification.  Other initiatives include:

  • A “Right to Know” rule-making initiative included in the Department’s Regulatory Agenda in 2010 and re-issued on December 21, 2012 that would update the recordkeeping regulations under the federal Fair Labor Standards Act “in order to enhance the transparency and disclosure to workers of their status as the employer’s employee or some other status, such as an independent contractor.”
  • A “Misclassification Initiative” to coordinate enforcement and information sharing with state workforce agencies.  To date, 13 states have signed Memorandums of Understanding with the U.S. Department of Labor:  California, Colorado, Connecticut, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah, and Washington. New York has reportedly agreed to enter into its own Memorandum of Understanding with the Wage Hour Division of the Labor Department.
  • A joint undertaking with the Internal Revenue Service, pursuant to a Memorandum of Understanding with the IRS signed on September 19, 2011.  The agencies have committed to coordinate their law enforcement efforts aimed at businesses that misclassify employees as ICs.

This new proposed study by the Labor Department appears to be most closely related to the proposed “Right to Know” rule that the Department has included on its Regulatory Agenda.

The Department’s focus on workers’ understanding of their classification as employees or independent contractors, to the virtual exclusion of employers’ misunderstanding of the confusing array of tests for independent contractor status under both federal and state laws, seems to be a profound misapplication of the budgeted funds for the survey. Even the Government Accountability Office has stated that “[t]he tests used to determine whether a worker is an independent contractor or an employee [at the federal level] are complex, subjective, and differ from law to law” (see GAO Report No. 06-656 at 25).  The tests used by state regulatory agencies in enforcing state laws are even more diverse than the federal tests, leaving both businesses and employees equally confused.

Takeaway:

Most companies with business models that are IC-dependent or simply make use of multiple ICs are aware that they are at risk of IC misclassification liability if they have not properly classified these workers. Recognizing which tests will be applied to the workers in question by the most relevant federal agencies and the applicable state agencies is one of the first steps, using the 48 Factors-Plus™ analysis, in determining where a business falls on the IC Compliance Scale™.

Once a company’s level of compliance is so measured, it can then enhance its IC compliance by restructuring, re-documenting, reclassifying, or redistributing contingent workers, using a process such as IC Diagnostics™ as described in my White Paper on minimizing IC misclassification liability.

Written by Richard Reibstein.