Tough times call for serious crackdowns ”“ and employee classification has been no exception.
According to the U.S. Government Accountability Office, the federal government loses an estimated $3 billion each year in tax revenue as a result of employees misclassified as independent contractors.
The federal fiscal budget of $117 billion included an appropriation of $25 million for a misclassification initiative calling for additional oversight in year 2011.
“When people say this is old news, it”™s not,” said Joshua Hawks-Ladds, partner and chairman of the employment and labor section at law firm Pullman & Comley L.L.C., which operates offices in Hartford, Bridgeport, Stamford and White Plains, N.Y. “It”™s really at the forefront of labor issues. In this tough economy, more and more employers are trying to get away with misclassification. It saves them money and the government views this as cheating, hurting employees and their ability to collect taxes and Social Security. It”™s a tax issue, it”™s a labor issue and it”™s a general employment issue.”
On a state level, in March, Connecticut Attorney General Richard Blumenthal, who is in the running for the U.S. Senate seat, announced a crackdown on employee misclassification through the Joint Enforcement Commission on Worker Misclassification; it is co-chaired by Labor Commissioner Linda Agnew.
White Plains, N.Y.-based Certified Public Accountant Alan Badey, partner at Citrin Cooperman & Co. L.L.P., noted the somewhat cyclical rise-and-fall of audits.
“It kind of heats up and it slows down,” he said. “The reason it”™s real hot right now is because of the way the economy is working and so many people are getting put on as temporary employees, but this is something the IRS, Department of Labor and Workers”™ Compensation Board have been battling for many years.”
Hawks-Ladds said that oftentimes, misclassification does not necessarily happen with intent.
“Virtually, every week I come across employers who have treated workers as independent contractors and although they thought they were, they aren”™t,” he said.
The misclassification also occurs among exempt and non-exempt employees.
Bady, too, said some employers are simply unaware that they”™re not following the rules and “are doing their best to knock their budgets down.”
“When you hire from a temporary agency, you pay the temporary agency the fee for the person to work there, and they are not your employee,” he said. “Employers might equate this to hiring a part-time employee as a part-time independent contractor. However, the law does not equate the amount of time a person works for you with treatment as an independent contractor. It”™s really all about control. If you have control over the employee: when they”™re coming to work, what they”™re working on, how much they”™re getting paid, it”™s more likely they”™re going to be considered an employee and not an independent contractor.”
Of the resulting loss in revenue from employee misclassification, Hawks-Ladds said it could easily be “20 or 30 percent.”
And the government is not the only interested party.
“Insurance carriers are concerned about this as well,” he said. “What with worker”™s compensation premiums and Social Security taxes, there are many monetary add-ons on top of the base wage each employer must pay for each employee. The employer saves money by not having to provide health insurance, paid leave time and general liability insurance.”
From an employee viewpoint, Hawks-Ladds said there are some contractors who do not wish to be classified as employees.
“I had a case involving a computer technician and he was actually on our side because he did not want to be an employee ”“ he wanted to be a contractor,” he said. “But that”™s rare. While they (contractors) lose some independence, they gain (as employees) in dollars, benefits and for many of them, legal protections.”
