The combination of the Great Recession and the Obama Administration’s emphasis on adding more muscle to regulatory agencies are creating strong forces to rein in past with the use of independent contractors.
Over the past few decades, there has been a great deal of growth in the use of independent contractors by U.S. employers. There is widespread belief within the U.S. government that many of the independent contractors are really employees and that these misclassifications are affecting the federal government’s bottom line where employers fail to pay taxes they would be required to pay if a worker was classified as an employee. With the loss of millions of jobs during the past two years during the Great Recession and a federal government deficit running in the trillions of dollars, the federal government is now heavily motivated to confront the problem of misclassification.
President Obama’s 2011 budget request includes a proposal for a joint initiative between the Department of Labor (DOL) and the Department of the Treasury to decrease employee misclassifications. The proposal is projected to increase federal Treasury receipts by more than $7 billion over 10 years.
The DOL added 250 new wage and hour inspectors to its organization in 2009. Its 2011 budget request also includes $25 million for a “Misclassification initiative” enforcement effort. The request would fund 100 additional wage and hour inspectors and competitive grants to boost states’ incentives and ability to address the misclassification issue.
Also, the IRS recently launched a three-year audit campaign to examine the tax returns of 6,000 randomly selected employers nationwide. Among other issues, the IRS will determine whether employees have been properly classified and all payroll tax obligations have been paid. If an employer is found to have violated employment tax laws, it could face additional taxes, penalties and interest charges.
New federal legislation regarding misclassifications may also be coming, including the Independent Contractor Proper Classification Act (ICPCA), which President Obama sponsored when he was in the U.S. Senate. Although the ICPCA is currently inactive, it could be revised soon.
Employers should begin to take some steps to prepare for possible inspections and audits. Misclassifications can be very costly, resulting in owing misclassified employees back overtime and other pay as well as other civil penalties. Reviewing and, if necessary, reclassifying employee status can stop liability from continuing to build up. In some situations, it may even save an employer from agency fines and lawsuits.
While there are a number of factors that determine whether a worker is an employee or independent contractor, the following key points should help you in a self-audit of classifications:
- The agreement between you and your worker as to status is only one factor considered. A worker can be considered to be an employee even if you have established an independent contractor agreement in place. Employers should not assume that just because an employee agreed to be paid as an independent contract, government agencies or the courts will agree.
- The primary factor that carries the heaviest weight in determining if a worker is an employee or independent contractor is how much control the employer exercises over a worker. If the worker contracts for you and others, sets his or her own schedule, and supervises his or her own work, the worker is more likely to be considered an independent contractor. However, if the worker is required to work set hours at the employer’s place of business, and/or the employer has great say over the employee’s schedule, he or she is more likely to be considered an employee.
- Independent contractors are generally not engaged in the employer’s primary business. They typically are engaged in an occupation that, while useful to the employer, is distinct from the employer’s business.
Although this issue of independent contractor misclassification is quite old, it has continued vitality. There has been a significant increase in litigation, government enforcement and legislation over the misclassification of independent contractors in the last few year. It is equally clear that the focus on independent contractor misclassification, far from slowing down, will only continue to pick up steam.