The U.S. Department of Labor announced that they have earmarked $25 million to hire enforcement staff and agents to investigate companies who have classified workers as Independent Contractors when they are in fact employees. At the same time, the IRS plans to conduct 6,000 audits over the next three years because they believe misclassification is widespread. High tech, construction and home health industries have become targeted industry groups, as misclassification is believed to be widespread there. The federal and state governments believe that many employers are “harming workers” and “depriving them protections” granted to employees only. These agencies also know that misclassification is costing the government billions of dollars in lost tax revenues.As an employee, workers are afforded many benefits and protections not given to independent contractors. These include unemployment compensation, workers’ compensation and employment law protections, to name a few. So how do employers determine whether a worker is an employee or an independent contractor? Differentiating between the two is so difficult that even the courts have struggled with the issue. Every government agency has different criteria and tests to determine the correct status . The responsibility for making the right call falls on the employer. With multiple tests for different agencies and different court interpretations, employers who misclassify can expect big problems.
As employee misclassification continues to come under scrutiny, it is important for employers to be careful in classifying independent contractors in light of the potential risks. Along with payment of back taxes and potential interest also come heavy penalties, personal liability of corporate owners, possible criminal sanctions and the possibility of losing government contracts for federal contractors.
All employers who engage independent contractors should review each of their contractors and run the tests of each state and federal agency. Remember, a government audit will be painful, time consuming and very expensive.