The 2014 Budget and Independent Contractor Misclassification: “Preventing and Detecting Misclassification of Employees as Independent Contractors” Remains a Funding Highlight in President Obama’s Newest Budget

The President’s long-awaited 2014 fiscal year budget was released earlier today, April 10, 2013.  One of the “funding highlights” listed in the section of the Budget covering the Department of Labor is to “Maintain support for agencies that protect workers’ wages, benefits, health and safety, and invest in preventing and detecting the misclassification of employees as independent contractors.” 

On page 126 of the Budget, the President states that his Administration seeks to detect and deter the misclassification of workers as independent contractors. Specifically, the Budget states:

“When employees are misclassified as independent contractors, they are deprived of benefits and protections to which they are legally entitled such as minimum wage, overtime, unemployment insurance, and anti-discrimination protections. Misclassification, together with the underreporting of cash income for those paid as independent contractors, also costs taxpayers money in lost funds for the Treasury and in Social Security, Medicare, the Unemployment Trust Fund, and State programs. The Budget includes approximately $14 million to combat misclassification, including $10 million for grants to States to identify misclassification and recover unpaid taxes and $4 million for personnel at WHD [the Wage and Hour Division] to investigate misclassification.”

The Acting Secretary of Labor, Seth D. Harris, released a press release today about the fiscal year 2014 budget covering the Labor Department, listing the “Highlights of the FY 2014 budget request.” The third highlight provides: “Nearly $14 million to combat the misclassification of workers as independent contractors, which deprives workers of benefits and protections to which they are legally entitled and puts law-abiding businesses at a disadvantage against employers who violate the law.”

Commentary:

With the continued funding commitment by the President, the U.S. Department of Labor has, year by year, increased its own efforts and enhanced its enforcement coordination with other federal and state agencies. Last year, more state workforce agencies, including those from California and Louisiana, signed the Labor Department’s Memorandum of Understanding with states to work collectively with the federal government “to reduce misclassification of employees as independent contractors.” Most recently, Iowa signed the Memorandum of Understanding on January 17, 2013, joining those two other states as well as Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah, and Washington.

The Labor Department has also signed a Memorandum of Understanding with the IRS covering their “joint initiative to improve compliance with law and regulations administered by the IRS and DOL” to be “accomplished through enhanced information sharing and other collaboration” headed by a “joint IRS-DOL team.”

While federal legislative bills to curtain misclassification have not enjoyed bipartisan support, the emphasis on detecting and deterring IC misclassification has legislative support at the state levels; 24 states have passed legislation since July 2007 seeking to curtail IC misclassification through increased penalties, more stringent legal tests for ICs, information sharing among state agencies, and joint task force initiatives.

Best Practices for Enhancing Compliance:

Companies concerned about this continued crackdown on IC misclassification in the form of state and federal regulatory and enforcement initiatives and the proliferation of class action litigation can ameliorate their concerns in most instances by enhancing their IC compliance through IC Diagnostics™ and other means to minimize or eliminate misclassification liability.

Exposure to IC misclassification liability can be reduced by re-structuring, re-documenting, and re-implementing IC relationships, or re-classifying or re-distributing ICs.  That process oftentimes begins with an evaluation of the extent to which IC compliance should be enhanced, using, for example the IC Compliance Scale™ after examining the 48 Factors-Plus™ or other diagnostic tools. While there is no one-size-fits-all approach or simple fix, and standard or model agreements alone have little value in preventing misclassification liability, enhancing IC compliance is nonetheless readily attainable by many businesses. All too often, however, businesses wait until they receive an audit request by a tax or workplace agency, or a claim for unemployment or workers compensation benefits, or a court lawsuit. While those cases are not “lost causes” even at that late stage and can sometimes be won by counsel experienced in this area of the law, they can usually be avoided with efforts undertaken before receiving an audit request, claim, or summons and complaint.

Your comments are invited.

Written by Richard Reibstein.

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