Senate Committee Moves Ahead with Federal Bill Outlawing Misclassification of Employees as Independent Contractors

The Senate Committee on Health, Education, Labor and Pensions (HELP) wasted no time in holding a hearing on the “Employee Misclassification Prevention Act” (EMPA), which was introduced jointly on April 22, 2010 by the Senate (S. 3254) and House (H.R. 5107).  On June 17, 2010, the Senate HELP Committee, headed by its Chairman, Tom Harkin (D-IA) and the Ranking Member of the Committee, Michael B. Enzi (R-WY), led a hearing by the full Committee where a high-ranking member of the Obama Administration and three other panelists spoke in favor of EMPA, and one panelist spoke in opposition to the bill.

Deputy Secretary of Labor Seth Harris first spoke about the scope of the misclassification problem, the Labor Department’s ongoing efforts to detect and prevent misclassification, and the need for Congress to pass EMPA.  Secretary Harris focused on three aspects of EMPA:

  •  by making misclassification a violation of the Fair Labor Standards Act (FLSA), “[f]or the first time, misclassification would be against the labor law”;
  • the law, if enacted, would require employers to provide their workers with notice of how the worker is classified, and would establish a legal presumption that the worker is an employee if the business fails to give the worker the required notice;
  • it requires businesses to keep records of hours worked and wages paid to all workers (whether regarded by the business as employees or independent contractors) and authorizes the Labor Department to seek civil monetary penalties for recordkeeping violations.

Colleen Gardner, Commissioner of the New York State Department of Labor, next spoke in support of S. 3254.  After identifying New York’s efforts to eliminate and deter misclassification of employees as independent contractors, and the results of its efforts to date, the Commissioner of Labor praised several of EMPA’s provisions:  the requirement that the U.S. Department of Labor share information on misclassification violations with state workforce agencies; the promotion of state Unemployment Insurance tax audits; the recordkeeping requirements for non-employees; the presumption of employee status when businesses fail to comply with the new recordkeeping obligations; the enhanced penalties for misclassification violations; and the special notice provisions for workers treated as independent contractors.

The last three panelists were from private industry.  Frank Battaglia spoke on behalf of a construction contractor association and the Campaign for Quality Construction, comprised of union-represented contractors.  He argued that some construction firms have gained an unfair competitive advantage by intentionally misclassifying workers as independent contractors as a cost-cutting measure. Battaglia said: “Employers who misclassify their workers reap substantial savings and gain unfair competitive marketplace advantages by avoiding payment of Social Security and Medicare taxes, payment of federal and state unemployment insurance taxes, and payment of workers’ compensation premiums.”

Next was Catherine Ruckelshaus of the National Employment Law Project, a non-profit, pro-employee organization.  After arguing that misclassification is prevalent among low-paying jobs, and noting its impact on workers and federal and state governmental revenues, Ruckelshaus commented how state governments have taken the lead on reforms in the area of misclassification.  She then stated that “[i]f enacted, the EMPA would be an important first step to encourage transparency in employment relationships,” noting that if workers know about their employment classification and the impact of that status, they will be better prepared to report suspected violations.  She also commented that the U.S. Department of Labor would be better equipped to determine whether businesses are properly classifying their workers if companies are required to maintain records of wages and hours worked by their contractors, suggesting that the records required to be kept under EMPA “are records employers would likely keep in any event when dealing with outside vendors and contractors.”

The final panelist was Gary Uber, owner of a licensed nurse agency and member of a member of the Coalition to Preserve Independent Contractor Status.  Uber was the only panelist who was critical of the manner in which EMPA was drafted.  He stated:  “My concerns are that the increasingly intensified government efforts to identify misclassified workers and punish the firms that do business with them can result in firms, such as mine, deciding that the regulatory risks of doing business with independent contractors have become intolerable. If that were to occur, the millions of legitimate independent contractors, who – like any other business – need clients to survive, would begin to close their businesses and start looking for employment.”  Uber identified five principal concerns:

  • the proposed penalties for misclassification would increase the financial risks associated with doing business with independent contractors to an intolerable level;
  • the proposed recordkeeping requirements are unworkable for certain businesses;
  • the proposed notice requirement would adversely affect the working relationship between an independent contractor and the contractor’s clients;
  • the proposed anti-retaliation provision could reward unethical conduct;
  • the bill overall appears premised on the false assumption that the decision whether an individual will work as an employee or independent contractor is made by the firm that does business with the individual, rather than by the individual.

The identical bill in the House has been referred to the House Committee on Ways and Means Committee and its Committee on Education and Labor.  No hearings have yet been held in the House, but are expected to be scheduled soon.

Written by Richard Reibstein.

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One Response to Senate Committee Moves Ahead with Federal Bill Outlawing Misclassification of Employees as Independent Contractors

  1. FM Guilday says:

    The proposal itself causes the independent contractor relationship to take on characteristics of an employee relationship, as the contractor would have to report his hours to the company he is doing business with in order for that company to report it to the IRS. An independent contractor working his own hours from his own office should not need to keep track of nor report his hours, but rather submit an invoice to the business.

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