Guest Article

(From the April 30, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL and IRS Intensify Focus on Worker Misclassification

The misclassification of employees as independent contractors raises a whole host of issues, from the failure to withhold and pay Federal employment taxes, the failure to extend Federal leave rights, and the failure to pay minimum wage and overtime pay, to creating an economic disadvantage for those employers who do properly classify their workers. The problem was identified as a key one for the Administration by the 2010 Task Force on the Middle Class, which called for increased enforcement by the Department of Labor.

Labor Department Employee Misclassification Initiative

The Department of Labor's employee misclassification initiative is making noticeable progress. Since September 2011, the Department has entered into agreements with twelve states (and is pursuing agreements with others) to reduce employee misclassification, help reduce the tax gap, and improve compliance with Federal labor laws. So far, agreements have been entered into with California, Colorado, Connecticut, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington.

The Department is responsible for administering a wide range of Federal labor laws, including the Fair Labor Standards Act, the Family and Medical Leave Act, the Migrant and Seasonal Agricultural Worker Protection Act, the prevailing wage requirements of the Davis-Bacon and Related Acts, the Employee Retirement Income Security Act, and the Occupational Safety and Health Act. The states are concerned with similar issues, such as state labor and training, industrial relations, child labor, prevailing wage, occupational safety, and other labor and safety laws. The agreements generally call for the Department and the state to conduct joint investigations and share information as appropriate toward their common goals.

Employee misclassification is serious problem, the Department's initiative webpage explains:

Through its enforcement efforts the Department has found hundreds of misclassified workers who were owed millions of dollars in back wages. See Department of Labor website for: Press Releases: Employee Misclassification as Independent Contractors. Beyond the penalties on the non-compliant employers, the benefits denied to workers and the losses to the US Treasury, employee misclassification also creates economic pressures for law-abiding business owners who are forced to compete with those who are not complying with the law. One of the objectives of the Department's initiative is to "level the playing field for responsible employers by reducing the practice conducted by some businesses of misclassifying employees," the Department explained in its latest release about its agreement with the State of California.

IRS Agreement and Outreach Materials

A critical cornerstone of the Department's initiative is an agreement with the IRS, which was also entered into in September 2011. Similar to the agreements with the states, the agreement with the IRS calls for the two agencies to share information and collaborate on reducing worker misclassification, reducing the employment tax portion of the tax gap, increasing compliance with Federal employment and unemployment tax requirements, increasing compliance with Federal labor law, creating educational and outreach materials for employers and workers, and other objectives. Under the agreement the Labor Department will, in its discretion, refer to the IRS investigation data that raises Federal employment tax compliance issues related to misclassification. The IRS will, in its discretion and consistent with law, share the referrals with state and municipal taxing agencies.

Consistent with the goal of creating educational and outreach materials, the IRS recently updated its resource page: Independent Contractor (Self-Employed) or Employee? The page is a wealth of information on the employee classification rules. It provides a step-by-step process for determining whether a worker is an employee or independent contractor, and includes explanations of the employment tax obligations and the consequences of misclassification. The Voluntary Classification Settlement Program, by which employers can voluntarily come forward and re-classify their independent contractors as employees, is also discussed.

A one-hour Proper Worker Classification webinar is also available through the IRS Video Portal. Originally conducted on February 15, 2012, the webinar discusses the basic rules regarding the classification of employees as well as the settlement program.

Still in Need of a Legislative Fix

The February 2010 Report of the Task Force on the Middle Class also noted that the Treasury Department is seeking legislation that would allow it to better define and clarify worker classification standards and prospectively reclassify misclassified workers. (The IRS is now prohibited from issuing rules on worker classification.) That legislation, according to estimates cited in the report, would increase Treasury receipts by more than $7 billion over 10 years, with much of the increase consisting of taxes that are now unpaid. Last month, in March 2012, Congressman Jim McDermott (D-WA) together with 27 original co-sponsors introduced H.R. 4123 in the House. The bill would allow the IRS to define and clarify worker classification standards and impose reasonable penalties on non-compliant employers. A companion bill, S. 2292, was introduced in the Senate by Senator John Kerry (D-MA) with 8 original co-sponsors.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2012, Deloitte.