Worker Misclassification: A Continuing Employer Issue

Friday, January 20, 2012

Worker misclassification by employers as “independent contractors” continues to be a focus of the Internal Revenue Service, U. S. Department of Labor as well as the States Departments of Labor. On September 21, 2011, the IRS announced IR-2011-95, Voluntary Classification Settlement Program (VCSP) designed to allow non-compliant employers to pay a penalty of one percent of wages paid to reclassified workers during the prior year. Interest and penalties will be waived, and employers will not be subject to payroll tax audits for these workers for prior years.

On December 5, 2011 Colorado became one of the latest states joining with Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah, and Washington to cooperate with the Internal Revenue Service and the U. S. Department of Labor to combat worker misclassification by employers as independent contractors.

Even states not associated with joint efforts between IRS and DOL have taken actions to increase the oversight of worker misclassification. Both Pennsylvania and New Jersey enacted new legalization in 2011 to address misclassification in their construction industries.

So why the continued and on-going efforts to address worker misclassification by employers as independent contractors? The answer is very simple, lost tax revenue and non-compliance with state and Federal anti-discrimination and leave laws. In a time of reduced state and Federal tax revenue, lost Federal, state, and local income, Social Security, Medicare, workers' compensation and unemployment compensation taxes can be very significant. Place on top of that, recovered back wages, fines, fees, penalties, and judgments; and it is easy to see why regulatory agencies across the nation would want a piece of that pie.

In addition, as a misclassified worker, participation and contributions towards health care, pension, retirement and savings plans as well as other benefits are forgone; causing a shift in these burdens to governmental agencies. Furthermore, employers with misclassified works may find that they are also in non-compliance with Federal, state, and local anti-discrimination laws; subjecting themselves even more monetary damages.

Finally, the loss of public goodwill and brand name damage attributed to negative and highly visible and public notoriety to an organization is substantial. In one Illinois case involving five construction companies, in addition to fines, the companies were forbidden from bidding on construction projects for the next four years. It is likely that the fines paid by the five companies paled in comparison to the loss of the ability to bid on future contracts.