Just this week, the Department of Labor (DOL) and the Internal Revenue Service (IRS) announced they are joining together to prevent employers from misclassifying employees as independent contractors. On September 19, 2011, Secretary of Labor Hilda L. Solis hosted a ceremony at the DOL headquarters in Washington to sign a memorandum of understanding with the IRS, which allows the agencies to share information and coordinate enforcement of employers thought to be misclassifying independent contractors. Seven states also signed similar agreements, including Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington. Hawaii, Illinois, Montana, and New York are expected to follow shortly. California is likely to sign on at some point in the not too distant future.
The reasons behind the increased scrutiny are two-fold. For one, independent contractors are ineligible for minimum wage and overtime pay, unemployment insurance, workers’ compensation and social security benefits. Second, the government does not collect employment taxes on compensation paid to independent contractors. Therefore, where misclassification occurs, federal and state governments lose out on much needed tax revenues.
What does this mean for you? It is becoming increasingly apparent that both federal and state government agencies are cracking down on the misclassification of independent contractors. Employers who contract with independent contractors should carefully examine those classifications to ensure misclassifications are not occurring. Doing so will allow employers to avoid costly consequences due to increased federal and state scrutiny.