The President. The Department of Labor. The IRS. There is a great deal of pressure being exerted on employers to properly classify workers as either employees or independent contractors. According to Inc. President Obama’s 2011 budget includes funding for an additional 100 IRS employees to help crack down on the misclassification of workers as independent contractors. It is estimated that this will add an additional $7 billion in revenue over the next 10 years for the government. The IRS is also beginning a 3 year audit of 6,000 companies chosen by random, rather than issues with the company’s returns. The use of independent contractors can save companies as much as 30% in costs since they don’t have to pay for social security and medicare taxes, workers’ compensation, unemployment compensation, health insurance, vacation or sick leave. Last week, USA Today ran an article entitled IRS, States crack down on independent worker status abuse.
The New York Times published an article on February 18 entitled "U.S. Cracks Down on ‘Contractors’ as a Tax Dodge". The story referred to a federal study that concluded that 3.4 million workers were illegally misclassified as independent contractors instead of employees. The attorney general from Ohio believes that there are 92,500 misclassified workers in Ohio alone, costing the state over $363 million in lost unemployment insurance taxes, workers’ compensation premiums and income tax revenue. The article notes that the most frequently misclassified workers are "truck drivers, construction workers, home health aides and high-tech engineers." Misclassification of workers as independent contractors also prevents those contractors from receiving overtime if they would have been entitled to it if they were properly classified as non-exempt employees.
Finally, closer to home, a study in Tennessee found that 20% of construction workers in Tennessee were either misclassified as independent contractors or paid under the table.
Practice pointer. I routinely am involved in representing clients who misclassify employees, usually unintentionally. With the looming crackdown in misclassification by the federal government, now is a good time to review the classification of workers to make sure that they are being properly identified as either employees or independent contractors. Companies that are caught misclassifying employees as independent contractors face enormous financial penalties, including income tax, medicare and social security with holdings, and claims for overtime.