The President’s 2015 Budget: No Letup in the Federal Government’s Crackdown on Misclassification of Employees as Independent Contractors

The President’s 2015 fiscal year budget was released earlier today, March 4.  The fifth of six “funding highlights” listed in the section of the Budget covering the Department of Labor is “Increasing support for agencies that protect workers’ wages and overtime pay, benefits, health and safety, and investing in preventing and detecting the misclassification of employees as independent contractors.”

On page 108 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 the benefits and protections to which they are legally entitled, such as minimum wage, overtime, unemployment insurance, and anti-dis­crimination protections. Misclassification also unfairly disadvantages businesses who comply with the law and costs taxpayers money in lost funds for the United States Treasury, and in Social Security, Medicare, the Unemployment Trust Fund, and State programs. The Budget includes nearly $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 to investigate misclassification.”

Secretary of Labor Thomas E. Perez released a press release today about the fiscal year 2015 budget covering the Labor Department, listing the highlights of the budget request.  The second of five highlights provides: “Nearly $14 million to combat the misclassification of workers as independent contractors, which deprives them of benefits and protections to which they are legally entitled and disadvantages employers who comply with the law.”

Commentary:  No letup in the misclassification crackdown at the federal level

The President’s continuing funding commitment has enabled the U.S. Department of Labor, year by year, to increase its own efforts to detect and deter independent contractor misclassification and enhance its enforcement coordination with other federal and state agencies. In 2013, yet another state workforce agency, the New York State Department of Labor, as well as the New York State Office of Attorney General, signed a Memorandum of Understanding with the U.S. Labor Department to work collectively with the federal government “coordinate [state/federal] investigations and other enforcement activities” and exchange information to reduce misclassification of employees as independent contractors.  That brought the number of states to sign such agreements with the U.S. Department of Labor up to 15, including California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, 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.”

The Misclassification Initiative website of the U.S. Department of Labor reports on a number of enforcement actions each year.  Last year, the Labor Department issued 26 press releases about formal enforcement actions taken by the U.S. Department of Labor, including lawsuits and settlements of litigated and non-litigated matters.

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; half of the 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.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

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