Friday, June 3, 2011

Independent Contractor Misclassification Crackdown in 2011

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Misclassifying employees could get much more expensive in a hurry. The DOL’s strategic plan for 2011 through 2016 prioritizes investigations into employers’ misclassification of employees as independent contractors. The agency is partnering with the IRS to take a closer look at companies that may try to cut costs by avoiding paying employment taxes, overtime pay and benefits to workers who should be treated as employees.

Because the government agencies are beginning to share information with each other, an audit by one agency could lead to additional audits by other federal agencies or state governments. The DOL and IRS use different tests to determine independent contractor status and apply different consequences for misclassification. The DOL uses the “economic realities” test to determine the degree to which the employee controls the worker. Employers that are found to violate wage and hour laws may owe back pay, liquidated damages and attorneys’ fees. The IRS applies a 20-factor common law test to uncover misclassified workers, and violators are assessed penalties and back taxes. State government audits may lead to consequences under unemployment compensation and workers’ compensation laws.

Employers can take steps to protect themselves from misclassification violations by executing and diligently following independent contractor agreements, and by retaining outside counsel to perform classification audits before a government agency initiates an investigation. Has your company taken any steps to avoid misclassification issues?

--Vanessa Walts, Tax Law Editor (Compensation Planning)
 

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