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.

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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.

John Zappe is the editor of TLNT.com and a contributing editor of ERE.net. John was a newspaper reporter and editor until his geek gene lead him to launch his first website in 1994. He developed and managed online newspaper employment sites and sold advertising services to recruiters and employers. Before joining ERE Media in 2006, John was a senior consultant and analyst with Advanced Interactive Media and previously was Vice President of Digital Media for the Los Angeles Newspaper Group.

Besides writing for ERE, John consults with staffing firms and employment agencies, providing content and managing their social media programs. He also works with organizations and businesses to assist with audience development and marketing. In his spare time  he can be found hiking in the California mountains or competing in canine agility and obedience competitions.

You can contact him here.


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

  1. Not sure how I really feel about this, but something is wrong here. I applaud government catching law breakers and punishing them. I also see “bigger brother’ crossing the line and getting entangled in running businesses. Are we on a slippery slope? I wish I knew where this was going rather than to fear some hidden conspiracy theory in the back of my mind. It has been proven over and over than you can’t legislate morality, so some cheaters will always find a way to cheat and government will answer by feeding on this to engorge itself on tax dollars and get bigger. Why can’t we all just get along?

  2. On thing I can not get over is the need for this.  Over the past few years hundreds of Fair Standard Labor Cases are flooding the Federal Courts.  Mostly in the construction industry.  This includes Cable and Satellite workers in general.   From my research I found a few cases in which have found these workers by Federal Judges to be Employees, yet the companies still are operating in the same manner, IRS and DOL dont seem to have a clue or really dont care.  Now I will provide some cases with links and you be the judge 

    Cable worker “Was misclassified and died on the job”

    Judge said he was an employee based off the common law in 2005 um… almost 7 years ago and the company still operates this way.


    Heres another case which should have tipped off the Florida DOL and IRS “But hey…. There two busy to go after companies who operate I guess. This was in “2008” and they still operate along with the other companies doing the exact same thing year after year.   


    Just in Florida I estimate over 100,000 misclassified workers which almost all dont pay into the system.  Multiple this over the entire USA and theres not wonder why this country is in the hole.  

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