U.S. DOL to Ramp Up Enforcement Against Misclassified Workers

President Obama’s administration will seek more funding for the U.S. Department of Labor (DOL), including more funds to enforce wage and hour laws and pursue employers who misclassify employees as independent contractors. In a press release yesterday, Secretary of Labor Hilda L. Solis outlined the president’s fiscal year (FY) 2011 budget request for the DOL, which is built around the vision of “good jobs for everyone.”

The FY 2011 budget requests $117 billion, with the majority to be used for unemployment insurance benefits for displaced workers and federal workers’ compensation. The DOL’s discretionary request of $14.0 billion overall includes $1.7 billion for worker protection programs, a four percent increase over the prior year’s budget.

According to Secretary Solis, “[t]he FY 2011 budget will help to make the vision of good jobs for everyone a reality for America’s workers. This budget invests in innovation and reform that will play a critically important role in building long-term economic security for workers. At the same time, the budget reflects our commitment to fiscal responsibility, investing in what works and carefully evaluating our programs to make sure that we obtain results that produce good jobs.”

The DOL seeks to hire more than 350 new employees, including 177 investigators and other enforcement staff, many of whom will be bilingual to better communicate with employees. The 2011 budget builds on the 2010 budget policy of returning worker protection programs to FY 2001 staffing levels, after years of decline. The Wage and Hour Division of the DOL will receive $244 million, an increase of almost $20 million from the prior year, including funding to hire 90 new investigators.

One particular area that will be the target of enforcement is the use of independent contractors by employers. When workers are misclassified as “independent contractors,” they are deprived of benefits and protections to which they are legally entitled,” said the DOL. For example, independent contractors do not receive overtime and are ineligible to receive unemployment benefits. The FY 2011 budget includes an additional $25 million for a Misclassification Initiative to target misclassification with 100 additional enforcement personnel and competitive grants to boost states’ incentives and capacity to address this problem. (This $25 million includes the nearly $20 million increase for the Wage and Hour Division discussed above.)

Independent contractors, by definition, are self-employed and because they are not “employees” are not covered by employment, labor, and various tax withholding laws. In some instances employers reclassify employees as independent contractors in order to avoid taxes, payment of overtime and benefits, and workers’ compensation liability. However, whether or not a worker is covered by a particular employment, labor, or tax law hinges on the definition of an “employee.”

The IRS uses a 20-factor, right-to-control test to assess an employers’ tax liability. The DOL often relies on the so-called “economic realities test” or a hybrid of the right-to-control and economic realities test to determine independent contractor status. Some believe the economic realities test makes it harder to classify an employee as an independent contractor, since, in addition to considering the degree of control the employer exercises, it takes into account the degree to which the workers are economically dependent on the business.

The DOL’s efforts to crack down on the use of independent contractors is just the latest in a series of federal initiatives and state laws that have made this issue come under increasing scrutiny. For instance, in December 2009 legislation was introduced in the U.S. Senate that would make it more difficult for employers to classify workers as independent contractors for employment tax purposes. In October of last year, Maryland passed the Workplace Fraud Act, which made it a violation of law to fail to properly classify workers as employees and imposed penalties on those employers who knowingly misclassify their workers.

In July 2009, Delaware passed its own law imposing stiff penalties on construction industry employers who improperly classify employees as independent contractors to save on business costs and avoid paying appropriate taxes.

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