Feds and States Offer a Carrot as They Crack Down on Misclassified Workers

The federal government and several states are joining forces to crackdown on the misclassification of workers.

In the last few weeks, the Department of Labor and the Internal Revenue Service signed an agreement to more closely share information on how individual businesses classify their workers. Seven states signed on to the agreement and more are expected to participate in the program to identify and potentially prosecute employers who intentionally misclassify workers as independent contractors in order to evade compliance with  labor laws.

“We’re here today to sign a series of agreements that together send a coordinated message: We’re standing united to end the practice of misclassifying employees,” said Labor Secretary Hilda Solis during a signing ceremony on Sept. 19.

Two days later, the IRS announced a “Voluntary Classification Settlement Program.” It’s a sort of an amnesty program for employers with freelancers and independent contractors who want to convert them to employees. In some cases, employers may be convinced their independents are properly classified, but may choose to convert them to avoid a challenge. In other cases, the classification as independents may be a close call.

However, in all cases, employers who agree to the voluntary reclassification and meet the eligibility requirements will only have to pay 10 percent of the employment tax due on the compensation for the most recent tax year. They also won’t have to pay any interest and penalties on the federal employment tax liability, and, they won’t be audited for back taxes on the employee classification of prior years.

The voluntary program is similar to the current Classification Settlement Program, with the key exception being that it only applies to businesses that are not now under audit by the IRS.

The agreement among the states, the Labor Department and the IRS is the strongest signal yet that the government intends to crackdown on misclassified workers. One report says the federal budget includes enough of an increase in the Labor Department’s Wage and Hour Division to hire 4,700 additional investigators.

While the IRS program and the announcement of the agreement focuses on worker classification, a blog posting by the employment law firm Fisher & Phillips warns, “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’.”

The firm advises employers to reevaluate the appropriateness of their non-employee classifications and, if they should be the subject of a DOL review, assume that information will be shared with the IRS and state agencies.

If you should be on the fence about participating in the voluntary program, consider this recent court ruling out of Ohio. The court ruled that workers with a cable installation firm are employees and not independent contractors. The DOL is now seeking more than $1.6 million in penalties and back overtime wages for the workers.