For at least three years now, the U.S. Labor Department and the U.S. Internal Revenue Service (along with a host of analogous state and local agencies) have been on the alert for instances in which workers are erroneously considered to be independent contractors rather than employees.  The popular euphemism for these situations is "misclassification" (although this term is also used to describe the different problem of incorrectly treating employees as being exempt from minimum-wage and/or overtime requirements).

What's The Big Deal?

In significant part, this increased attention began with a straightforward motivation:  Government revenue collections have steadily declined in the sluggish economy, so officials at all levels are keenly interested in plugging any leaks.  As USDOL recently put it in a press release, "misclassification generates substantial losses to the U.S. Treasury and the Social Security and Medicare funds, as well as to state Unemployment Insurance and workers' compensation funds."

For its own part, USDOL has been hard at work ferreting-out "misclassification" under the Fair Labor Standards Act and the similar federal wage laws it enforces.  In just the last few weeks, for example, it has announced:

♦   A $105,000 overtime assessment against a Texas employer that had considered workers to be independent contractors for their first 90 days with the company; and

♦   A $101,000 demand against a Virginia employer that had considered individuals performing work on a government-funded construction contract to be independent contractors or to be subcontractors.

Numerous other USDOL "misclassification" investigations, and many private FLSA lawsuits challenging independent-contractor status, are underway across the country.

As we have also highlighted, some states have joined forces with USDOL.  And while North Carolina has not yet signed-on as far as we know, Gov. Beverly Perdue's August 22 Executive Order creating a "Task Force on Employee Misclassification" suggests that it might soon do so.  Among other things, the Task Force is responsible for:

♦   Identifying sectors of the economy where this occurs most frequently,

♦   Encouraging communication and cooperation between relevant state agencies,

♦   Considering regulatory changes likely to enhance legal enforcement efforts, and (perhaps most significantly),

♦   Identifying "ways to increase the filing of complaints by employees and other members of the public against noncompliant employers . . .."  [Emphasis added].

It's Smart To Think Ahead

All of this demonstrates yet again that organizations whose operating models are built even in part upon "contract labor", "freelancers", the oxymoronic term "contract employees", or independent contractors by any other name simply cannot afford to ignore the current enforcement climate.  The wise course is to evaluate without delay what the prospects are that such workers can be shown to be true independent contractors under each legal test that might be applied.

Perhaps the very first question should be whether the circumstances of the arrangement lend themselves to independent-contractorship at all.  In some situations, it will be unlikely that this status could be successfully defended, taking into account such things as the organization's need to control the worker's activities and all the other operational and managerial considerations involved in meeting the organization's objectives.

Even if the chances seem more favorable, management will want to be sure that is has done everything it can to strengthen its position.

◊   Have a comment or something else to add?  Please use our comment feature below.

The U.S. Labor Department continues to expand the number of jurisdictions and agencies with which it is collaborating to end what it has called "the business practice of misclassifying employees [as independent contractors] in order to avoid providing employment protections."  The most recent additions are the Colorado Department of Labor and Employment and the Louisiana Workforce Commission.

The list of those with whom USDOL has memoranda of understanding also includes:

◊   California, Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington,

◊   State labor officials in Hawaii, Illinois, and Montana, and

◊   New York's Attorney General.

The Colorado memorandum (link to copy below) exemplifies the nature of this cooperation.  Among other things, the state's Labor Department and USDOL pledge to:

◊   Conduct joint investigations periodically,

◊   Coordinate enforcement activities and provide mutual assistance,

◊   Refer potential violations of statutes enforced by the other,

◊   Develop "methodologies" for exchanging investigative leads and complaints, and

◊   Otherwise share information "as appropriate".

Companies and other organizations might as well assume that any investigation of independent-contractor status by one of these participants will result in the disclosures and referrals the memoranda call for.  Keep in mind also that USDOL has entered into a similar arrangement with the U.S. Internal Revenue Service.

This attention to the "misclassification" issue is unlikely to subside anytime soon.  For instance, there is reason to believe that USDOL's focus upon large homebuilders last fall is now turning outward to many of those companies' subcontractors and vendors.

The wise move for every organization relying even in part upon a contingent of independent contractors continues to be this:  Evaluate right now whether there is any vulnerability to a successful claim that those workers are instead employees.

◊   Have a comment or something else to add?  Please use our comment feature below.

USDOL-Colorado DOLE Agreement.pdf (79.04 kb)

We wrote previously about the announcement of a cooperative alliance between the U.S. Labor Department and the U.S. Internal Revenue Service aimed at ending what the Secretary of Labor called "the business practice of misclassifying employees [as independent contractors] in order to avoid providing employment protections."

If that news was not enough to get everyone's attention, the terms of the "Memorandum of Understanding" between these agencies (link to copy below; copy courtesy of CCH) should cause all employers to take notice.  DOL and IRS have agreed to implement their agreement "through enhanced information sharing and other collaboration" led by a "joint IRS-DOL team".

Some Of The Details

Among other things, DOL will "refer to the IRS .  .  . Wage and Hour Division investigation information and other data that DOL believes may raise Internal Revenue employment tax compliance issues related to misclassification."  DOL will also share "Wage and Hour Division training materials and opportunities with the IRS .  .  .."

For its part, IRS "will evaluate and classify employment tax referrals provided by the DOL and .  .  . [will] conduct examinations to determine compliance with employment tax laws."  And in at least some instances IRS is prepared to "share the employment tax referrals provided by the DOL with state and municipal taxing agencies .  .  .."

The two agencies have also committed to "coordinate national outreach activities."  This will include such steps as "joint national press releases" and "joint messages to national stakeholder organizations."  The Memorandum does not identify any of these "stakeholder organizations", but one may hazard an educated guess as to what the identities of at least some of them might be.

The administration's "transparency" mantra has been suspended where the Memorandum is concerned.  For example, the document asserts "a need for the government to provide information to other law enforcement bodies without making a public disclosure."  DOL and IRS say that they intend to preserve their "legal privileges or other legal protections against disclosure" to outsiders, and they contend that information exchanges between them will not be a "public disclosure" under the federal Freedom of Information Act.

Points To Consider

The many take-aways include these:

◊   Once again, every company or other organization relying even in part upon a contingent of independent contractors should immediately evaluate whether there is any vulnerability to a successful claim that those workers are instead employees.

◊   Every such company or other organization being investigated by DOL should assume that information provided about independent contractors will be given to IRS and, potentially at least, to analogous state or local agencies and officials.

◊   Employers must of course abide by their legal obligations in DOL and IRS investigations and audits.  But, within those parameters, management should be careful in deciding (i) what documents and other information to provide, and (ii) how, under what circumstances, and with what caveats to disclose them.  DOL and IRS say that they intend to protect certain confidential or private information and trade secrets that are covered by federal laws and regulations.  However, an employer cannot be sure whether DOL or IRS will agree with the employer (or even with one another) that each document or item of information is protected against disclosure to some other person or entity, or that a court will agree with DOL's or IRS's views in some later third-party legal action to compel disclosure.  And the best of intentions cannot preclude an erroneous, mistaken, or inadvertent release of information to the public.

◊   While the Memorandum's principal focus appears to be worker misclassification, it does not say that the collaboration is restricted to this topic.  For instance, the "joint outreach" is said also to encompass "other issues of mutual interest."

DOL IRS Memodandum of Understanding.pdf (216.50 kb)

◊   Have a comment or something else to add?  Please use our comment feature below.