On September 30, 2010, the U.S. Department of Labor released its Strategic Plan for Fiscal Years 2011 – 2016. Among the goals listed by Labor Secretary Hilda Solis is to identify and deter the misclassification of employees as independent contractors. The Strategic Plan states in part as follows:
WHD will be a key partner in a joint Department of Treasury-Department of Labor initiative to detect and deter the misclassification of employees as independent contractors and to strengthen and coordinate federal and state efforts to enforce labor law violations arising from misclassification. Individuals wrongly classified as independent contractors are denied access to critical benefits and protections – such as family and medical leave, overtime, minimum wage and unemployment insurance – to which they may be entitled as regular employees. Employee misclassification also generates substantial losses to the Treasury and the Social Security, Medicare, and Unemployment Insurance Trust Funds. In its last comprehensive estimate of the scope of the misclassification problem for tax year 1984, the Internal Revenue Service estimated that 15 percent of all employers misclassified a total of 3.4 million employees as independent contractors, resulting in an estimated annual revenue loss of $1.6 billion in 1984 dollars ($3.4 billion in 2010 dollars). (Click “More” for “Commentary” below)
Commentary: The commitment of the U.S. Department of Labor to detect and deter misclassification is unwavering, and it has the resources allocated to it in the Budget by the Obama Administration to make substantial inroads, on its own and together with the Treasury Department, in curtailing and penalizing misclassification. Meanwhile, many state Labor Departments and state Attorneys General have taken increasingly aggressive steps to detect and deter misclassification.
In an unusual twist, it appears that the federal government is actually following in the footsteps of state governments when it comes to misclassification. Indeed, before becoming the Solicitor of Labor in the U.S. Department of Labor, M. Patricia Smith was the leader of the New York State Joint Employment Taskforce on Misclassification, while serving as Commission of Labor in New York.
Should Congress not proceed quickly enough in passing the two pending misclassification bills jointly introduced in the House and Senate this year (the Employee Misclassification Prevention Act and the Fair Playing Field Act of 2010), it is likely that, in the short term, even more states will pass new or more stringent laws cracking down on misclassification.
Meanwhile, many state Unemployment offices are beginning to question more and more businesses about misclassification of workers being treated by employers as independent contractors. And where state Unemployment offices determine that workers have been misclassified, they are now sharing such information with the IRS in over 30 states under the November 2007 Questionable Employment Tax Practice (QETP) initiative. Under that program, state employment officials have agreed to share information about misclassification with the IRS, and vice-versa, pursuant to individual information-sharing agreements between the IRS and the 30+ states that have now signed on with the IRS.
Written by Richard Reibstein.