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Congress is trying to crack down on employers who misclassify workers as independent contractors, as a way to avoid paying more in salary, benefits and taxes. It’s a good idea in theory but human resources professionals warn that there is already confusion about the definition of independent contractor. Additional laws may make it even more confusing.
Recently, Congressional Democrats have proposed the Employee Misclassification Prevention Act of 2008 (H.R. 6111) , which would increase penalties on employers who misclassify workers as independent contractors and would step up law enforcement efforts to catch employers who break the law.
Full-time employees misclassified as independent contractors lose rights, such as workers’ compensation coverage, minimum wage and overtime protections, family and medical leave, and the right to organize and collectively bargain, according to the bill’s proponents.
More than 10 million workers in the U.S. are classified as independent contractors. Several studies in individual states report that these workers are misclassified, deliberately or otherwise, as independent contractors when they are really regular employees, according to Democratic Congressional Representatives. For example, a Massachusetts study found that 11.4 percent of the state’s construction workers had been misclassified as independent contractors between 2001 and 2003. And an Illinois study found that misclassification had increased by 55 percent between 2001 and 2005.
By improperly categorizing employees as independent contractors, employers are able to avoid payroll taxes. A Coopers & Lybrand study estimated that the federal government lost $34.7 billion in unpaid taxes between 1996 and 2004 as a result of the misclassification of workers, according to a Congressional document.
To help remedy the situation, the Employee Misclassification Prevention Act of 2008 would:
- Impose penalties on employers who misclassify employees as independent contractors.
- Require employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification.
- Require state unemployment insurance agencies to conduct audits to identify employers who are misclassifying employees.
- Track and monitor states’ effectiveness in identifying employers who misclassify employees.
- Allow the U.S. Department of Labor and the Internal Revenue Service to share information on cases where employers misclassify workers.
- Mandate that the Department of Labor perform targeted audits focusing on employers in industries that frequently misclassify employees.
Human resources consultant Christine Walters, speaking on behalf of the Society for Human Resource Management , testified before Congress last year that there can be confusion over independent contractor status. Conflicting definitions are found in federal or state laws, as well as in court decisions, she said.
“Additional law in this area is likely to only add to the existing confusion,” she said. “Instead, solutions need to focus on the education and the enforcement aspects of the problem.”
Walters said that guidance from relevant agencies on the classification of employees would greatly assist employers in complying with the law. Enforcement of existing law should not only be increased, it should be coordinated among the relevant federal agencies, she said. The focus therefore should be on improved enforcement, clarification and information sharing, Walters added.
It’s important to note that the use of independent contractors is a common practice in some industries, particularly in health care, she added. Independent contractors also include workers who want or need income while they are between jobs or workers returning to the workforce after being a full-time parent.
No doubt there are misclassifications of the workers now in the independent contractor status. But many employers and employees rightfully use that category to meet their individual needs -- as the law intended. Whatever solution the government comes up with, it should help employees not hurt them. And employers need an easy to understand law that the government finds easy to enforce.