Misclassification

Defining the working relationship between “employees” and “independent contractors” is one of the most troublesome and important issues facing businesses today. Classifying workers as independent contractors allows companies to avoid paying minimum wage, overtime, Social Security and Medicare taxes, unemployment insurance taxes, workers’ compensation premiums, and circumvent federal antidiscrimination laws. Consequently, misclassification denies workers of rightful protections and privileges under state and federal law. Meanwhile, avoiding the payment of certain taxes and wages gives employers a competitive advantage and thus, an economic incentive to misclassify.  Such forces could lead to what has been coined in the wage-and-hour context as a “regulatory race to the bottom.” Lastly, misclassification also causes federal, state and local governments to suffer revenue losses as employers circumvent their tax obligations. 

In an attempt to combat this scourge, states have employed multidisciplinary and multifaceted approaches, including the formation of state task forces, federal-state cooperation and litigation. Here are some examples:

Federal Action

The U.S. Department of Labor’s Misclassification Initiative, launched under Vice President Biden’s Middle Class Task Force, seeks to combat this pervasive issue on a national level and restore crucial employee rights to those denied them. In September 2011, former Secretary of Labor Hilda L. Solis announced a major step forward with the signing of a Memorandum of Understanding (MOU) between the Department and the Internal Revenue Service (IRS). Under this agreement, the agencies will work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.

Additionally, labor commissioners and other agency leaders representing thirty-five states (as of Nov. 2016) have signed MOUs with the Department’s Wage and Hour Division, and in some cases, with its Employee Benefits Security Administration (EBSA), Occupational Safety and Health Administration (OSHA), Office of Federal Contract Compliance Programs (OFCCP), and the Office of the Solicitor. Under the Obama Administration, the U.S. Labor Department actively pursued MOUs with additional states as well.

These MOUs will enable the U.S. Labor Department to share information and to coordinate enforcement efforts with participating states in order to level the playing field for law-abiding employers and to ensure that employees receive the protections to which they are entitled under federal and state law. Employers that misclassify their employees may not be paying the proper overtime compensation, FICA and Unemployment Insurances taxes, or workers' compensation premiums.