Feds, Legislators Increase Efforts to Crack Down on Employee Misclassification

Are you sure your company’s independent contractors are not really employees? The federal government wants to find out. Treating workers as independent contractors has many benefits for companies, including avoiding the requirements of numerous state and federal employment laws. It also deprives the government of billions of dollars in tax revenue – a huge issue in light of the growing deficit.

Karin McGinnis, a litigator and employment and labor lawyer with Moore & Van Allen, warns that employers’ liability risk has increased significantly due to recent moves by federal agencies and a rising tide of class-action lawsuits and multi-district litigation (one notable recent case involves Federal Express). Two bills currently before Congress will only increase the risk for employers. McGinnis contends that “savvy employers will act now to correct any misclassifications before investigators come knocking.”

The federal agencies in question – the U.S. Department of Labor and the Internal Revenue Service – recently announced an interagency initiative to crack down on the misclassification of employees. The Department of Labor’s fiscal 2011 budget requests $25 million and more than 100 new full-time investigators and other employees specifically for this initiative. And, during the next three years, the IRS will randomly select 6,000 taxpayers for a comprehensive employment-tax audit focused on employee classification and other issues.

A bill introduced into Congress in April would make misclassification of workers a labor law violation, impose record-keeping and notice obligations upon businesses, and subject them to hefty penalties for non-compliance.

“The landscape has changed,” McGinnis says. “The uncertainty and risk associated with employing independent contractors is significant. However, there are actions employers can take now to avoid the consequences of misclassification – consequences such as significant liquidated damages, attorney fees, years of back pay, Department of Labor audits and collective-action litigation.”

McGinnis is available for an interview or to write an article on how employers can limit their liability by ensuring employees are classified properly.  [07/15/2010]