Washington D.C. Employment Law Update : Washington D.C. Employment Lawyer & Attorney : Littler Mendelson Law Firm : Virginia, Tyson's Corner

In a press release, Sen. Brown stated: “Intentionally treating workers as subcontractors when they really are employees is payroll fraud: it cheats workers, taxpayers, and other businesses that play by the rules,” adding: “By cracking down on payroll fraud, this bill will protect workers and level the playing field for all employers.”

In June 2010, the Senate Committee on Health, Education, Labor and Pensions held a hearing to address the misclassification issue. 

In addition to legislative efforts to curb worker misclassification, various federal agencies are involved in an initiative to target this practice. For example, as part of the Department of Labor’s (DOL) budget plan and regulatory agenda, the department intends to add 107 full-time equivalent employees to support the Administration's multi-agency initiative to detect and deter the inappropriate misclassification of employees as independent contractors and to strengthen and coordinate federal and state efforts to enforce labor violations arising from misclassification. In addition, the WHD intends to develop a proposed rule that would update the recordkeeping regulation issued under the FLSA to “promote greater levels of compliance by employers, to enhance awareness among workers of their status as employees or independent contractors and employee rights and entitlements to minimum wage and overtime pay, and to facilitate DOL enforcement.” More recently, the budget deal pending in Congress would allocate at least $21,332,000 to the Secretary of Labor “for the purposes of program evaluation, initiatives related to the identification and prevention of worker misclassification, and other worker protection activities.”

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Earlier versions of these bills, which were introduced in 2009 as the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408, S. 2882), but have languished in committee, also took aim at employee misclassification and the section 530 safe harbor. The section 530 safe harbor provision provides that it would be considered “reasonable” to classify an individual as an independent contractor for federal employment tax purposes if the employer relies on: (a) a past IRS audit with respect to the taxpayer; (b) published rulings or judicial precedent; or (c) long-standing recognized practice in the industry. Moreover, the employer must not have treated the individual as an employee for any period. For any time after 1978, all of the employer’s federal tax returns must reflect that the workers were classified as independent contractors. Along the same vein, in order to benefit from the safe harbor provision, the employer must not have classified workers performing substantially similar work as employees. The updated version of the legislation would exempt certain skilled workers from the application of the proposed new safe harbor rules.

As summarized in a press release, the Fair Playing Field Act aims to “close a tax loophole currently allowing businesses to misclassify workers as ‘independent contractors,’ thereby creating an unfair environment for businesses that play by the rules and an unfair environment for workers,” by doing the following:

• End the moratorium on Internal Revenue Service (IRS) guidance addressing worker classification. The Secretary of Treasury would be directed to issue prospective guidance clarifying the employment status of individuals for federal employment tax purposes.
• Amend the provisions of the tax code that provide for reduced penalties for failure to deduct and withhold income taxes and the employee’s share of FICA taxes.
• Require persons who contract independent contractors on a regular and ongoing basis to provide a written statement to each independent contractor of the federal tax obligations of independent contractors, the labor and employment law protections that do not apply to independent contractors, and the right of the independent contractor to seek a status determination from the IRS.
• Require the Secretary of the Treasury to issue annual reports on worker misclassification.

The Senate bill has been referred to Senate Finance Committee, while the House companion bill has been referred to the House Committee on Ways and Means.

Worker misclassification has recently received increased attention by both the Administration and Congress. The President’s budget for the 2011 fiscal year includes provisions that target the misclassification of employees as independent contractors and are estimated to raise more than $7 billion in revenue over 10 years. In June, the Senate Committee on Health, Education, Labor and Pensions (HELP) held a hearing on this issue. Specifically, the HELP Committee debated the merits of the Employee Misclassification Prevention Act (H.R. 5107, S. 3254), legislation that would, among other things, amend the Fair Labor Standards Act (FLSA) to require employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification.

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In April, a bill was introduced in both the House and Senate that specifically targets misclassification. The Employee Misclassification Prevention Act (H.R. 5107, S. 3254), introduced by Rep. Lynn Woolsey (D-CA) and Sens. Sherrod Brown (D-OH) and Tom Harkin (D-IA), would, among other things, amend the Fair Labor Standards Act (FLSA) to require employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification. Other bills introduced this legislative term that address worker misclassification include the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) introduced by Sen. John Kerry (D-MA), and a similar bill (H.R. 3408) with the same name introduced by Rep. Jim McDermott (D-WA). Both bills would revise section 530 of the Revenue Act of 1978, known as the “safe harbor” provision, which currently allows employers to designate certain workers as independent contractors for federal employment tax purposes.

On the regulatory side, the DOL’s 2011 budget contains a number of provisions for programs to address this problem. For example, the DOL recently launched a public awareness campaign targeting worker misclassification. As mentioned by Sen. Harkin, in January the DOL hired more investigators to pursue misclassification, and the Internal Revenue Service “is working on a comprehensive nationwide employment tax audit program aimed, in part, to catch companies that improperly fail to withhold taxes and pay Social Security and Medicare premiums on the wages of workers misclassified as independent contractors.”

In his testimony, Deputy Labor Secretary Seth Harris highlighted a number of the DOL’s other regulatory activities aimed at reducing worker misclassification, such as the “Plan/Prevent/Protect” compliance strategy, which will require employers to (1) create a “plan” for identifying and remediating risks of employment law violations and make the plans available to workers so they can participate in their creation, fully understand them, and help to monitor their implementation; (2) thoroughly and completely implement the plan in a manner that “prevents” legal violations; and (3) ensure that the plan’s objectives are met on a regular basis so that it actually “protects” workers from violations of their workplace rights. Harris also noted that the DOL’s Wage and Hour Division (WHD) is considering a rule that would require an employer to disclose the analysis it used to determine that a worker is an independent contractor to the affected individual, and keep a record of the analysis for review should a Wage and Hour investigator seek this information. Harris concluded his testimony by stating that the DOL “strongly endorses” the Employee Misclassification Prevention Act, and that this legislation “is needed to provide DOL with additional tools that the Department cannot use without action by the Congress.”

Other panelists also spoke in favor of the DOL’s enforcement efforts and the misclassification legislation. For instance, Frank Battaglino, a business owner speaking on behalf of the Sheet Metal and Air Conditioning Contractors’ National Association as well as the Campaign for Quality Construction, testified that companies that regularly misclassify employees as independent contractors can offer bids for projects that are 20 to 30% below those offered by businesses that do not use this practice. He urged “responsible employers and government alike” to “partner for this cause.”

Not every panelist, however, approved of the bill. Gary Uber, co-founder of Family Private Care, Inc., a licensed nurse registry, testified on behalf of Private Care Association, Inc., a member of the Coalition to Preserve Independent Contractor Status. Uber expressed concern that “the increasingly intensified government efforts to identify misclassified workers and punish the firms that do business with them can result in firms . . . deciding that the regulatory risks of doing business with independent contractors have become intolerable.” Additionally, Uber claimed that the legislation’s proposed recordkeeping requirements are unworkable for a caregiver registry; that the proposed notice requirement would adversely affect the working relationship between an independent contractor and the contractor’s clients; that the proposed anti-retaliation provision could reward unethical conduct; and that the legislation itself is “premised on the false assumption that the decision whether an individual will work as an employee or independent contractor is made by a firm doing business with the individual, rather than by the individual.”

A complete list of the panelists and copies of their testimony can be found here.

Solis stated that $1.7 billion in discretionary funds and 10,957 full-time equivalent employees would be devoted to worker protection activities, including an employee misclassification initiative. This initiative would use $25 million to create a multi-agency program to strengthen and coordinate federal and state efforts to enforce statutory prohibitions on misclassification, and identify and deter instances of employee misclassification as independent contractors. The DOL’s Wage and Hour Division (WHD) would receive $12 million and 90 new investigators to expand these enforcement efforts. In addition, the misclassification initiative would support new, targeted efforts to recoup unpaid payroll taxes through state audits of problem industries supported by federal audits, and by means of a $10.9 million pilot program that would reward the states that are the most successful or improved at detecting and prosecuting employers that fail to pay the appropriate taxes due to worker misclassification. The budget would also allocate $1.6 million to the Office of the Solicitor to hire 10 full-time equivalent employees and enhance enforcement strategies; provide $150 thousand to the Occupational Safety and Health Administration (OSHA) to train inspectors on worker misclassification issues; and promote legislative changes that would require employers to properly classify their workers, impose penalties for noncompliance, and provide employee protections in the event employees are wrongly categorized as independent contractors.

In addition to the worker misclassification initiative, Solis explained that the budget request of $244.2 million for the WHD would support targeted investigations, compliance assistance, and the reduction of repeat violations of minimum wage, overtime, and workplace safety laws. The Office of Federal Contract Compliance Programs (OFCCP) would receive $113.4 million and 788 full-time equivalent employees, which would, according to Solis, “allow OFCCP to broaden its enforcement efforts and focus on identifying and resolving both individual and systemic discrimination.” Pursuant to the OFCCP’s enforcement of Executive Order 11246, Equal Employment Opportunity, the agency plans to renew its focus on conducting reviews of the construction industry.

With respect to workplace safety, Solis said her request of $573.1 million and 2,360 full-time equivalent employees for OSHA would redirect 35 such employees from compliance assistance to enforcement. In addition, the budget includes an additional request of $4 million to expand OSHA’s regulatory program, $1 million for consultation programs focused on small businesses, and $1.5 million for state plans.

The Secretary’s testimony reflects the shift in focus and resources towards enforcement activity by the DOL. With an enhanced emphasis on enforcement, employers can expect greater scrutiny of their practices by the Department.

The budget proposal follows previous efforts by President Obama to address the issue of worker misclassification. As a Senator, President Obama introduced legislation similar to the current budget proposal that would make it more difficult for businesses to treat individuals as independent contractors rather than employees. Later versions of this legislation are now pending in Congress. Sen. John Kerry (D-MA) and Rep. Jim McDermott (D-WA) have introduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882, H.R. 3408), legislation that would revise the Revenue Act of 1978’s “safe harbor” provision to make it more difficult for employers to classify workers as independent contractors for employment tax purposes, and significantly increase employer penalties in the event of misclassification, among other things. The President’s budget proposal is expected to build momentum for such legislation and bring greater scrutiny to independent contractor classification.

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