As government budget deficits increase, the misclassification of employees as independent contractors has become the focus of increased scrutiny by federal and state government agencies seeking to recover what they perceive to be lost revenue. In September 2009, the IRS unveiled its intention to target 6,000 companies for a special audit in order to reduce the number of misclassified independent contractors and recoup tax income. The Department of Labor’s recently approved budget for fiscal year 2011 includes the Wage and Hour Division’s $25 million employee misclassification initiative to detect and deter misclassification of employees as independent contractors. This budget initiative is expected to yield collections of more that $7 billion over the next 10 years from employers that misclassify workers.
Legislation has also now been introduced in Congress to address employee misclassification. The Employee Misclassification Prevention Act (H.R. 5107, S.3524), which is currently pending in committees in both the House and the Senate, would amend the Fair Labor Standards Act to add employer recordkeeping requirements as well as notice requirements to non-employee workers about proper classification. This proposed law would also add civil penalties for recordkeeping and misclassification violations of up to $1100 and up to $5000 for each repeated or willful violation. The current version of this legislation would also double the amount of liquidated damages for overtime violations for misclassified workers. Certain states, such as Colorado, have recently passed laws creating penalties of up to $5,000 per misclassified employee for the first offense and up to $25,000 per employee for subsequent violations. Several other states, including Iowa, New Jersey, New York, Maine, Michigan and Massachusetts, have created multi-agency task forces to combat worker misclassification.
Locally, we have already seen an increase in the Department of Labor’s emphasis on challenging independent contractor relationships. In Florida, claims for unemployment compensation by terminated independent contractors often result in employers receiving and responding to questionnaires from the Agency of Workforce Innovation, the answers to which can lead to the State challenging the independent contractor status of entire groups of what they claim to be misclassified employees and seeking back taxes, interest and penalties over a 5-year period. Moreover, since the state government balances its unemployment tax payments received with the federal government at the end of each year, this can also lead to federal government claims for back FUTA and FICA contributions.
As a result of this increased scrutiny, it is very important that employers engaging in legitimate independent contractor relationships enter into properly drafted written agreements with independent contractors before the work begins with adequate specificity to demonstrate an independent contractor relationship. Independent contractors must be independent entities that are treated the same as any vendor providing services and must be paid on invoices from accounts payable, rather than from payroll with benefits or taxes deducted. They must not be treated the same way as employees, and in most cases, companies should not retain former employees as independent contractors, and certainly not change them back and forth from employee to independent contractor status.
There are numerous different factors companies should follow to evaluate and protect their independent contractor relationships in the face of increased government scrutiny. If you would like assistance or further advice proposing appropriate agreements or further examining these relationships, please contact any member of our Labor and Employment Law Department .