Practice Areas

Government Agencies are Going After Employers Who Wrongly Classify Employees as Independent Contractors

September 2011

By: Nancy E. Joerg, Esq.

On September 19, 2011, Secretary of Labor Hilda L. Solis hosted an historic ceremony at U.S. Department of Labor headquarters in Washington. Ms. Solis signed a memorandum of understanding with the Internal Revenue Service intended to improve the U.S. Department of Labor's energetic efforts (across the United States) to end the business practice of misclassifying employees.

In addition, labor commissioners and other agency leaders representing seven states signed memorandums of understanding with the U.S. Department of Labor's Wage and Hour Division and, in some cases, its Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and Office of the Solicitor. The signatory states involved are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington. Secretary Solis also announced agreements for the Wage and Hour Division to enter into memorandums of understanding with the state labor agencies of Hawaii, Illinois and Montana, as well as with New York's attorney general. This giant cooperative effort is intended to stamp out misclassification of independent contractors across the United States.

These newly signed memorandums of understanding will enable the U.S. Department of Labor to share information and coordinate law enforcement with the IRS and participating states. The stated purpose is to level the playing field for law-abiding employers and ensure that employees receive the protections and rights to which they are entitled under federal and state law.

These new memorandums of understanding arose as part of the U.S. Department of Labor's Misclassification Initiative. The Initiative was launched by Vice President Biden's Middle Class Task Force with the goal of preventing, detecting and remedying employee misclassification across the U.S.

"We're here today to sign a series of agreements that together send a coordinated message: We're standing united to end the practice of misclassifying employees," said Secretary of Labor Solis. Solis added, "We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike."

"This agreement takes the partnership between the IRS and Department of Labor to a new level," said IRS Commissioner Doug Shulman. "In this new phase of our relationship, we will work together more efficiently to address worker misclassification issues, and better serve the needs of small businesses and employees."

Now, when an individual files a complaint with the U.S. Department of Labor claiming that he or she was not being paid as an employee (i.e., worked as a misclassified employee), the U.S. Department of Labor will share this information with the IRS and with states that have signed agreements with the U.S. Department of Labor.

These government agencies believe that employers who misclassify their employees as independent contractors often do so to avoid paying taxes, workers' compensation insurance premiums, and other costs such as employee benefits. In the government perspective, this intentional misclassification allows these employers to unfairly undercut their competition and makes it harder for legitimate businesses to compete.

In view of this determined effort by the IRS, the U.S. Department of Labor, and state agencies to share information and coordinate law enforcement in order to "level the playing field" for what they term law abiding employers, any companies using independent contractors should be sure to have their independent contractor relationships evaluated to see if the relationship is supported by Federal and State law. Also, any independent contractor agreements, websites, independent contractor manuals, etc. should be very carefully reviewed by experienced legal counsel.

Readers should be aware that the independent contractor tests for the IRS, U.S. Department of Labor and various states all may vary considerably. Therefore, research must be done for a company using independent contractors to determine potential liability under the different independent contractor tests and definitions.

Don't delay in doing what you can to limit your liability in using independent contractors.

Questions or concerns? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.