Employee Misclassification Prevention Act

Tuesday, June 1, 2010

Senator Sherrod Brown and others introduced S.3254, “Employee Misclassification Prevention Act” in the US Senate and Representative Lynn Woolsey and others introduced H.R.5107, a companion bill to S. 3254, both bills are designed to amend the Fair Labor Standards Act of 1938 and prevent misclassification of employees as independent contractors. Concern over misclassification of employees as independent contractors re-emerged after a United States Government Accountability Office (GAO) report released in August 2009 titled “EMPLOYEE MISCLASSIFICATION Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention”. The report concluded, “The national extent of employee misclassification is unknown; however, earlier and more recent, though not as comprehensive, studies suggest that it could be a significant problem with adverse consequences. For example, for tax year 1984, IRS estimated that U.S. employers misclassified a total of 3.4 million employees, resulting in an estimated revenue loss of $1.6 billion (in1984 dollars). DOL commissioned a study in 2000 that found that 10 percent to 30 percent of firms audited in 9 states misclassified at least some employees.”

An IRS audit of Microsoft for tax years 1989 and 1990 found that Microsoft had incorrectly classified a large number its workers as so-called "contingent workers" when in actuality they were common law employees. The IRS applied a 20-factor test to determine whether the workers were contractors or employees. The factors included a review of the workers’ level of supervision, location of work performed, and other issues. The audit resulted in an appeal, which found its way to the US Supreme Count which then ruled that Microsoft had in fact misclassified workers are “contractors” in error. In reaching that decision, the Court rejected IRS’ 20-factor test in lieu of a 12-factor test to conclude that Microsoft had incorrectly classified the workers as contractors. The Court’s 12-factor test originated from an earlier decision in Nationwide Mutual Insurance Co. v. Darden.

1. Skill required;

2. Source of tools and instrumentalities;

3. Location where work performed;

4. Duration of relationship of parties;

5. Hiring party's right (or lack thereof) to assign additional projects;

6. hired party's discretion over when and how long to work;

7. Method of payment;

8. Hired party's role in hiring and paying assistants;

9. Whether the work is part of hiring party's regular business;

10. Whether the hired party is in business;

11. Whether "employee benefits" are provided; and

12. The tax treatment of the hired party.

The Court remanded the case to the lower court for determination using the factors from the Darden case.

As with any issues dealing with legal compliance, employers should seek, qualified professional assistance before making changes in their work place practices.