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Misclassification as Independent Contractors Becoming Significantly Riskier

inspect-expectUnder the Obama Administration, the Department of Treasury and the Department of Labor are developing a plan to team up to address the misclassification of workers as independent contractors.  President Obama has stated that he can increase the federal coffers by $7 billion through aggressive enforcement of employee misclassifications over the next ten years

Some commentators advise that an aggressive IRS plan to conduct 6 thousand audits that focus on employment tax-related issues is underway.  The IRS has recently added 200 new employment tax auditors.  In the DOL budget for 2010, it provided for an increase 250 wage and hour investigators.  On February 1, 2010, the Administration increased the overall budget for 2011 by $25 million and sought to add 100 additional enforcement personnel.    

Employers are encouraged to reevaluate their use of the independent contractor classification immediately.  While the classification of workers as independent contractors might be considered an attractive and economical alternative to increasingly burdensome regulation, the risks of misclassifications are significant.  Moreover, employers are exposed to significantly less liability with independent contractors as compared to employees.  For instance, except in a few limited circumstances, discrimination under Title VII of the Civil Rights Act of 1964 does not apply to independent contractors. 

The analysis for determining whether it is appropriate to classify a worker as an independent contractor is difficult.  Moreover, different governmental agencies apply different tests to determine whether the classification is appropriate.  For instance, the IRS has a complicated and fact-intensive analysis that uses a 20 factor test to determine independent contractor classification.  In contrast, the DOL uses a seven part test that centers on the degree of control by the employer over the work performed.  The more control exercised by the alleged employer, the more likely an employment relationship exists.

There is little doubt that, when correctly utilized, the independent contractor classifications can provide a significant cost savings to employers. However, given the likely increase in the DOL’s enforcement efforts, employers should scrutinize their current classifications and carefully consider whether this classification is appropriate for workers in the future.

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