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

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.

• Impose civil penalties under the FLSA (up to $1,100 per employee for first offenders; $5,000 per employee for repeat or willful violations) on employers that misclassify employees as independent contractors;
• Amend the Social Security Act to establish administrative penalties for misclassifying employees, or paying unreported wages to employees without proper recordkeeping, for unemployment compensation purposes;
• Mandate state unemployment insurance agencies to conduct audits to identify employers who are misclassifying employees;
• Direct the Department of Labor (DOL) to perform targeted audits focusing on employers in industries that frequently misclassify employees;
• Allow the DOL and the Internal Revenue Service to share information on cases where employers misclassify workers;
• Track and monitor states’ effectiveness in identifying employers who misclassify employees; and
• Require the DOL to create a website summarizing employee rights under this Act.

In a statement, Secretary of Labor Hilda Solis praised this bill, adding that:

The Department of Labor is working with the Vice President's Middle Class Task Force and the Department of Treasury on a multi-agency initiative to develop strategies to address this issue [of worker misclassification]. The administration's budget request for fiscal year 2011 includes $25 million for the Department of Labor as part of this initiative, including $12 million for increased enforcement of wage and overtime laws in cases where employees have been misclassified. The Wage and Hour Division is currently considering how to best target its FY 2011 enforcement efforts and is emphasizing misclassification in its ongoing FY 2010 enforcement strategy.

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.

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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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Under the terms of this legislation, an employer’s decision to classify a worker as an independent contractor would be deemed “reasonable” if the employer reasonably relied on a written determination addressing the employment status of the individual or another individual holding a substantially similar position with the employer, or a concluded employment tax examination that did not find that the individual (or one holding a substantially similar position) should be considered an employee. In addition, the employer or its predecessor must not have treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after December 31, 1977. The assessment of whether an individual holds a substantially similar position held by another would be made using criteria established by the Fair Labor Standards Act.

This legislation would also strengthen employer reporting requirements. Businesses that pay more than $600 during the year to corporate providers of property and services would be required to file an information report with each provider and the Internal Revenue Service (IRS). In addition, the bill would allow individuals deemed independent contractors to petition the IRS for a determination of whether they are properly classified as independent contractors, and would significantly increase employer penalties in the event of misclassification. Such misclassification penalties include the following:

• Minimum of $250 (up from the current $50) per incorrect tax return, up to $3,000,000 (currently $250,000) per year. Lower penalties would be imposed if the returns are corrected within a specified period of time, although the amounts are significantly greater than those currently imposed on employers for misclassification.
• Smaller employers (those with gross receipts not exceeding $5,000,000) would be subject to fines of up to $1,000,000 per year, up from the current $100,000 limitation.
• In the event of intentional disregard for the filing requirement, employers would be subject to a $500 fine per tax return, up from the current $100 amount. The $3,000,000 per year penalty ceiling would not apply in this instance.

A similar measure with the same title was introduced in the House of Representatives in July. The new Senate companion bill has been referred to the Senate Committee on Finance.

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