October 2011

Minnesota, along with six other states, recently subscribed to a strategy of information sharing with the United States Department of Labor (DOL) and the Internal Revenue Service (IRS) that will lead to increased enforcement efforts in targeting employers that misclassify their employees. This strategy - done through the use of memorandum of understandings - now allows Minnesota state agencies, such as the Department of Employment and Economic Development, the Department of Revenue and the Department of Human Rights, to fshare information with the DOL and IRS and to coordinate enforcement activities for the overall purpose of ensuring that employees are receiving all of the protections to which they are entitled under state and federal law. In addition to this new memorandum of understanding, the DOL announced that its Wage and Hour Division had the authority to enter into similar agreements with Illinois, Montana, New York and Hawaii, thus paving the way for future cooperation between the DOL and those states on misclassification issues as well. Setting the agenda for the federal DOL, Secretary of Labor Hilda L. Solis stated "[w]e'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."

In general, companies misclassify people performing work for the business when they do not count them as "employees" of the company. This distinction is more than mere semantics. Employers are required to pay payroll taxes for employees as well as making payments to state unemployment compensation funds and other state related programs or insurance. Employees may also be eligible to participate in the company's benefitf plans, whereas non-employees (such as independent contractors, contingency workers, etc.) would not qualify, nor would the company pay payroll taxes for these individuals. Because of the numerous legal requirements and state and federal laws governing the employment relationship (each one with its own respective oversight agency), the proper classification of workers is not a trifling matter.

For those familiar with the government's Middle Class Task Force and specifically its Misclassification Initiative, this coordinated effort among state and federal agencies should come as no surprise. Focus on employee misclassification has been on the rise for several years, in part because of the Misclassification Initiative; in part because of the increasing number of lawsuits against companies over these matters; and in part because so many companies fail to fully appreciate the legal distinction between employees and non-employees. The fact that these agencies are now sharing this information on an unprecedented level, however, means that an initial audit from one agency may ultimately lead to an audit or enforcement action taken by another. It means that businesses will no longer have the comfort of dealing exclusively with either the state agency or a federal agency in defending against employee misclassification investigations. Rather, employers embroiled in such enforcement actions should now anticipate several relevant agencies from both the state and federal government becoming involved. The importance of responding to the investigation by one government agency accurately, expeditiously and with the benefit of counsel has now increased significantly.

Businesses are advised today, more than ever, to review their use of contingency workers, temporary workers and independent contractors to ascertain whether they are properly classifying these people as non-employees. Whether for the defense of your company against government audits, lawsuits or for helping you to audit your classification practices, contact Wessels Sherman to discuss the legal nuances involved with misclassification of employees and how to develop the best strategy for protecting your business.