California and U.S. Labor Department Enter into Memo of Understanding to Jointly Combat Independent Contractor Misclassification

In a news release issued earlier today, February 9, 2012, the California Labor Commissioner co-hosted a press teleconference with the Deputy Administrator of the U.S. Department of Labor during which they announced the signing of a memorandum of understanding between the two agencies focused on misclassification of employees as independent contractors.  The regulators discussed how the federal government and the state of California will embark on new efforts, guided by their agreement, to reduce the practice conducted by some businesses of issuing 1099s to workers who should be treated as employees that are entitled to overtime, unemployment, and workers’ compensation.

Memoranda of understanding between the U.S. Labor Department and state government agencies have now been signed with Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington, as well as California.  The memorandum for each of those states can be found on the U.S. Labor Department’s Misclassification Initiative website.

Joint federal-state partnerships highlight the need for companies to examine their use of 1099ers and other contingent workers to determine if they have a need to enhance their independent contractor compliance. These types of federal-state agreements, together with the agreement signed between the U.S. Department of Labor and the IRS, are being treated as wake-up calls for many U.S. businesses that make use of 1099ers and other contingent workers.

As the state and federal regulators remarked today, their agencies are focused upon business models that “are used to evade compliance with the law.” However, they also remarked that “[b]usiness models that . . . change . . . or eliminate the employment relationship are not inherently illegal . . . .”  Thus, both agencies acknowledge that businesses can legitimately use independent contractors, provided the use is compliant with legal standards.

Takeaway:

Many businesses that rely upon 1099ers to augment or staff their workforce suspect that their independent contractor agreements may be outdated at best and recognize that their day-to-day practices are often inconsistent with the structure of the relationship set forth in the IC agreement.  Such companies are asking questions such as, how can we be sure that our business model will pass scrutiny with federal or state regulators or class action lawyers?  Can the positions we pay on a 1099 basis be structured legitimately as an independent contractor relationship?  Do such positions need to be re-structured, re-documented, or put into practice in a manner different than the way we are doing it now?

Pepper Hamilton’s multi-disciplinary Independent Contractor Compliance practice uses its IC Diagnostics™ process to answer those types of questions, utilizing  proprietary tools, including its 48 Factors-Plus analysis and its IC Compliance Scale™.  These tools are used to enhance IC compliance in order to minimize the risk that increased government regulation will determine that a company’s otherwise legitimate IC relationships are being used to evade compliance.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

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