Department of Labor looking to crack down on independent contractor misclassification

In my email today the following article popped up:

March 22 2010
Vorys Sater Seymour and Pease LLP logo

To reduce costs, employers have turned to independent contractors to perform traditional staff functions. Unlike employees, independent contractors generally do not qualify for benefits and employers of independent contractors are not liable for Federal Insurance Contributions Act (“FICA”) contributions, Federal Unemployment Tax Act (“FUTA”) contributions, state unemployment contributions, workers’ compensation premiums, or overtime.

Experts believe numerous employers wrongly classify employees as independent contractors. One study concluded that employers illegally passed off 3.4 million employees as independent contractors, while the Department of Labor (“DOL”) estimates that up to 30 percent of employers misclassify employees. Ohio Attorney General Richard Cordray estimates that 92,500 workers are misclassified in Ohio, which costs the state up to $35 million a year in unemployment insurance taxes, up to $103 million in workers’ compensation premiums and up to $223 million in income tax revenue. “It’s a very significant problem,” Cordray recently stated in The New York Times.

Recent Developments

Facing record budget deficits, many government agencies have started aggressively pursuing employers that misclassify regular employees as independent contractors. President Obama recently proposed a $25 million DOL “Misclassification Initiative,” targeting the misclassification of employees as independent contractors. The Initiative would provide 100 additional DOL enforcement agents and increase states’ capacities to address misclassification. This follows a joint proposal by the DOL and the Department of the Treasury to enhance both agencies’ authority to penalize employers that misclassify employees.

Similarly, Delaware and Maryland recently imposed new penalties on employers that knowingly misclassify workers as independent contractors. Similar legislation has been introduced in Pennsylvania. In Ohio, Attorney General Cordray announced a collaboration between his office and the Ohio Department of Job and Family Services, Ohio Department of Taxation, and Ohio Bureau of Workers’ Compensation (“BWC”) to target employers that misclassify employees as independent contractors.

With the Attorney General’s attention focused on the costs of employee misclassification, Ohio employers that misclassify employees risk significant taxes, fines, penalties, and increased workers compensation premiums. In addition, misclassified employees have brought multi-million dollar class-action lawsuits against employers for failure to pay proper wages and overtime.

Employee or Independent Contractor?

The existence of an independent contractor agreement, by itself, does not create an independent contractor relationship where an employer-employee relationship actually exists. Rather, multiple factors determine whether a worker is an independent contractor, and different factors are considered by different agencies. For tax purposes, the Internal Revenue Service considers which party has control over the work being performed. For wage-and-hour purposes, courts and the DOL analyze the “economic realities,” which focus on whether the worker is an employee or in business for himself, and the Ohio BWC employs its own 20-factor test.

With increased scrutiny of purported independent contractor relationships, employers should re-evaluate their worker classifications. Such a review could reduce the risk of costly taxes, fines, and penalties for employers in the event they have misclassified their employees as independent contractors

So What? Total Workforce Risks Are Imminent.

I reached out to a few attorney friends and asked – how real is this? I personally know we have been getting phone calls to do more contingent workforce audits.

The reality is those who do AAP consulting such as Pinnacle AAP ( have seen an increase in audit requests related to OFCCP compliance. This is due to new OFCCP leadership, the changes in business philosophy and the fact that auditors will be going directly onsite with client corporations.

New laws are coming into effect such as Bill 139 in Canada. Bill 139 is designed to provide new rights for temporary workers and will change how staffing providers charge and manage these resources. Cheryl Thacker and Darryl R. Hiscocks in an article published about this bill state: Temporary agencies typically charge a significant “finder’s fee” to prevent or discourage a client from hiring a temporary employee permanently. Under the proposed legislation, temporary agencies would be prohibited from charging a “temporary to permanent” fee where the employee has been working for the client company for six months or more. This would imply that an audit of tenure and cost of conversion will need to be monitored and audited for legal compliance.

Other areas of contingent management risk that we see are: Are your 1099’s valid?, Do 1099’s have the appropriate insurance? How long have 1099’s and contractors worked for your organization? How are contractors treated inside your organization? Do the rates you have negotiated with your supplier are they being adhered too? How are contractors and temporaries acquired and tracked? When a contractor leaves, how are they off-boarded? When a contractor is converted to full-time, how is this tracked in the permanent hiring process? How do you track people who are laid off from full-time and immediately accept a contract position?

The reality is talent acquisition and management is a process that must be well managed. The type of talent and the changes in our working environment will challenge the whole concept of “full time” work as we know it today. I see this as a perfect storm, where companies are changing, the laws and risks are coming into focus and the ability to respond effectively will require the talents of multiple disciplines. The reality is, we need people to do the work. The type of people will vary based upon the work and end product desired. HOW we acquire, pay and manage these peoplewill need to be better structured, managed, tracked and trended – so risk, cost, quality and HR effectiveness can be accomplished at the end of the day. Policies can no longer be lightly interpreted because sites such as are bringing to the forefront the lawsuits and costs associated with IRS and OFCCP activities. We have now entered the age of TOTAL WORKFORCE MANAGEMENT. Ready or not, here it comes.

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