Feds eye worker misclassification
The Internal Revenue Service and the U.S. Department of Labor are increasing their scrutiny of whether employers are misclassifying workers as independent contractors, in a bid to save money on taxes, benefits or operating costs they might otherwise have to accrue for regular employees on the payroll.
The Progressive States Network and other critics argue employers can cut their operating costs as much as 30 percent by doing so, while shifting some of those costs onto the backs of workers.
The IRS indicated last month it will audit some 6,000 employers nationally in an effort to determine how much money they are saving by misclassifying workers as contractors. DOL and nearly 30 states are collaborating with the IRS on the study.
The federal effort follows those in Connecticut and other states to crack down on any exploitation of workers by employers as a result of the practice. In 2007, Connecticut enacted a law allowing the state to issue a stop order on employers who misrepresent the number or type of their employees for purposes of the workers”™ compensation system, including a $1,000 fine for violations; and in 2008 the state established a commission to review the problem of employee misclassification.
In the past few years, commercial vehicle drivers sued delivery companies like FedEx, UPS and Westport-based Velocity Express Corp., arguing they were misclassified as independent contractors despite being assigned route schedules that allowed them no time to make deliveries for other companies ”“ in a sense, making them captive workers without the benefits.
The Velocity Express case was consolidated in Wisconsin, and a judge there issued a stay of actions against the company last September after Velocity Express declared bankruptcy before being acquired by private equity investors.
Last year, multiple states stiffened further the penalties for misclassifying workers ”“ in the case of Delaware, construction companies now face a $20,000 fine for each occurrence, and any public agency doing business with that company can withhold payment in amounts sufficient to cover what is owed those workers.
In 2007, Cornell University researchers analyzed the problem in New York and determined that nearly 40,000 businesses there misclassified a total of more than 700,000 workers, about 15 percent of them in the construction industry. Cornell said that cost New York some $175 million annually in unemployment insurance taxes it otherwise would have been able to collect.
Last year, New York fined employers $6 million after uncovering more than 12,000 cases.
In Illinois, officials announced a $330,000 fine against a single employer for violating its own rules on worker misclassification.
The Association of Corporate Counsel says companies can expect an unprecedented increase this year of efforts to cap any abuses, and that companies should apply a litmus test of whether they exert control over how employees perform work; how much those workers can make on the job; and how employers and workers themselves view their working relationship.
“What does this all mean for employers?” wrote Daniel Schwartz, an attorney with Pullman & Comley L.L.C., in his Connecticut Employment Law blog. “For starters, it means it”™s time for companies to do a hard look at their wage-hour practices and how they classify their work force.”