Labor chiefs support employee misclassification legislation

The heads of state labor agencies support proposed federal legislation that would crack down on employers who misclassify their employees to avoid paying workers' compensation and other taxes.

State officials from New York and Iowa recently testified at a Senate Committee on Health, Education, Labor and Pensions hearing regarding the Employee Misclassification Prevention Act. The legislation, introduced in April by Sen. Sherrod Brown, D-Ohio, and Rep. Lynn Wolsey, D-Calif., would protect workers from being misclassified as independent contractors and ensure access to fair labor standards, health and safety protections, and unemployment and workers' compensation benefits.

New York State Labor Commissioner Colleen C. Gardner urged lawmakers to pass the bill to address an issue that "hurts workers, deprives the government of tax revenue, and undercuts legitimate employers who classify their workers correctly." Gardner highlighted the success of the New York Joint Enforcement Task Force on Employee Misclassification, which was created in 2007. Since its inception, the task force has identified nearly 35,000 instances of employee misclassification and triggered 67 enforcement actions in a dozen cities throughout the state.

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Increased penalties and audits. Specifically, the Employee Misclassification Prevention Act would require employers to keep records that reflect the accurate status of each worker as an employee or nonemployee; increase penalties for employers who misclassify their workers; require employers to notify workers of their classification; create an employee rights Web site to inform workers about their federal and state wage and hour rights; and provide protections to workers who are discriminated against because they have sought to be accurately classified.

In addition, Brown said the legislation would improve federal and state efforts to detect and stop misclassification by mandating that states conduct audits to identify employers who misclassify workers and by requiring that Department of Labor monitor states' efforts to identify misclassification. The bill would also direct states to strengthen their own penalties for worker misclassification; permit the DOL and Internal Revenue Service to refer incidents of misclassification to one another; and direct the DOL to perform targeted audits focusing on employers in industries that frequently misclassify employees.

Growing problem. Committee Chairman Sen. Tom Harkin, D-Iowa, said the scope of the misclassification problem is staggering.

"There are more than 10.3 million workers in the United States who are treated as independent contractors," he said. "That's roughly 7.3 percent of the workforce. And a Department of Labor study found that as many as 30 percent of businesses misclassified employees as independent contractors."

Harkin and Elisabeth Buck, director of Iowa Workforce Development, touted the success of the state's Misclassification Task Force.

"For example, in its first year of operation, Iowa's misclassification program uncovered 182 employers misclassifying 1,565 workers," Harkin said. "That amounts to over $27 million in total unreported wages, $1 million in unemployment taxes due, and $340,000 in unemployment penalties and interest."

Harkin said that despite the efforts of several states that have begun cracking down on misclassification, it will take a concerted effort by federal and state agencies to solve the problem. Several agencies, he said, are off to a good start. The DOL, for example, hired more investigators to pursue misclassification earlier this year, and the IRS is also 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.

"But federal and state agencies can't do it alone," he said. "We also need federal legislation to hold employers accountable for breaking wage and hour laws by misclassifying their workers."

Read more at the WorkersComp Forum homepage.

August 12, 2010

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