Alert: Federal and State Crackdown on Employee Misclassification Announced

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September 22, 2011

On September 19, 2011, the U.S. Department of Labor and the Internal Revenue Service announced a reinvigorated enforcement initiative to end misclassification of employees as independent contractors.  Employee misclassification is a business practice that has proliferated across numerous industries.  Various studies have shown that up to 10 to 30 percent or more of employers misclassify workers as independent contractors.  Minnesota, along with six other states, Connecticut, Maryland, Massachusetts, Missouri, Utah and Washington, also joined forces with the Wage and Hour Division of the federal Labor Department to address this issue through increased enforcement of existing laws.  Four other states, Hawaii, Illinois, New York and Montana, announced an intention to embark on similar law enforcement campaigns.

From a public policy standpoint, employee misclassification hurts not only affected employees, but also reduces tax revenues and creates unfair competition for law-abiding employers.  Misclassification denies affected workers the protection of workplace laws, such as minimum wage and overtime laws, as well as the economic benefits of employment status, such as the availability of employer-sponsored health insurance.  Moreover, misclassification reduces revenue that would otherwise flow into unemployment and workers' compensation funds and federal, state and local tax coffers.  Further, misclassification denies business competition on a level playing field.  Employee misclassification is most prevalent in industries with thin financial margins, such as construction and agriculture, making it all the more difficult for employers who play by the rules to compete effectively.

In 2005, Minnesota passed a law prohibiting the misclassification of employees as independent contractors.  That law, however, provided a civil remedy and the right to sue only to workers in the construction industry.  In 2009 and again in 2010, legislation was introduced in Congress to make employee misclassification a violation of the federal Fair Labor Standards Act.  The so-called Employee Misclassification Prevention Act was referred to committee, where it died.

But federal and state tax laws are implicated when a worker who actually is an employee is treated as an independent contractor instead.  For example, if a worker is an employee, the recipient of the worker’s services would be obligated to withhold FICA from the worker’s pay and to pay the employer portion of FICA, as well.  Those monies go missing when misclassification occurs.  Hence, the Labor Department is teaming with the Internal Revenue Service to forward the Labor Department’s policy objectives.

If you have questions or need additional information, please contact your Briggs and Morgan attorney.