At a signing ceremony at the offices of the Department of Labor in Washington, D.C., the DOL and the IRS signed a memorandum of understanding that will likely result in increased DOL and IRS enforcement proceedings against employers accused of misclassifying employees as 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.
Independent contractors are ineligible for minimum wage and overtime pay, unemployment insurance, workers' compensation and social security benefits. And, the government does not collect employment taxes on compensation paid to independent contractors. Therefore, if an employee is misclassified as an independent contractor, he or she loses out on valuable protections and the government loses out on substantial tax revenues. A 2007 Government Accountability Office report stated that:
In its last comprehensive misclassification estimate, the Internal Revenue Service (IRS) estimated that 15 percent of employers misclassified 3.4 million workers as independent contractors in 1984, resulting in an estimated tax loss of $1.6 billion (or $2.72 billion in inflation-adjusted 2006 dollars) in Social Security tax, unemployment tax, and income tax.
The memoranda of understanding arose as part of the DOL's Misclassification Initiative, which itself arose out of the Middle Class Task Force led by Vice President Biden. The MOUs will enable the DOL to share information and coordinate enforcement activities with the IRS and participating states.
What does this mean? Employers who use independent contractors will face multi-pronged scrutiny and enforcement proceedings, from the DOL, the IRS, and various state agencies. Employers found to be in violation may face steep penalties, such as the mandatory three-times-unpaid-wage penalty in Massachusetts. Be proactive- make sure your workers are classified properly and will be able to withstand the scrutiny.
Follow this link to read Employment Matters for additional insights from Martha J. Zackin of Mintz Levin's Boston office.