Government To Crackdown On Businesses That Misclassify Workers As Independent Contractors

Worker misclassification costs the federal government $1.6 billion annually. In late 2010 the IRS and the U.S. Department of Labor (DOL) announced an interagency misclassified worker initiative designed to target and pursue employers who misclassify workers. The DOL is dedicating $25 million and at least 100 employees to this initiative.

    

While not good news for employers who misclassify workers, the initiatives are good news for employers who properly classify their employees, because employers who misclassify workers do not pay into the unemployment or workers' compensation pools, employers who comply with the law must pay more than they otherwise would have to pay if more employers.

Many businesses mistakenly believe they have discretion to designate a worker as an employee or an independent contractor, or that however the business and the worker prefer to characterize the relationship controls.

As State & Federal taxing authorities rely more heavily on IRS Form 1099 data to determine which businesses to target for a worker misclassification audit, the names on 1099s could become one of a business' biggest points of vulnerability.

Employers who misclassify workers run risks that include, but are not limited to: having to pay back taxes, interest and penalties; owing back wages and penalties for violating federal and state wage and hour laws; penalties for failing to obtain and properly maintain Form I-9s; jeopardizing the ERISA qualified status of their 401(k) or pension plans; and owing more for workers' compensation premiums. 

On the state level the costs are also dramatic. More States will be utilizing IRS Form 1099 data to target businesses for audit and a growing number of States Including New Jersey are moving to enact legislation designed to increase revenues when misclassified workers are discovered.

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