It's always risky to misclassify someone who should be an employee as an "independent contractor," but President Obama's 2011 budget proposal will increase the risks for employers. According to this budget summary from the U.S. Department of Labor, the misclassification of employees as contractors is estimated to cost the Treasury Department over $7 billion in lost payroll tax revenue over the next ten years. To help make up for this shortfall, the proposed budget includes funds earmarked for a "joint proposal" between the DOL and the Treasury Department to eliminate legal incentives for such misclassification, and an additional $25 million to target misclassification with 100 additional enforcement personnel and competitive grants to boost states’ incentives and capacity to address this issue.

If this budget provision goes into effect, employers will need to be particularly careful not to misclassify employees as contractors. Of course, it's already a risky proposition to misclassify employees as contractors. For example, as we reported back in 2008, FedEx was on the wrong end of a $14 million award after a California court concluded that the shipping giant misclassified hundreds of drivers as contractors. Lawsuits in this area are common, ranging from individuals seeking unpaid wages and overtime to multi-million dollar class actions. Federal and state governments are also known to go after employers for unpaid payroll taxes and associated penalties.

Are you concerned that your independent contractor might actually be a misclassified employee? The IRS has published this handy information on how to determine whether the employee is correctly classified. There is even an IRS form (Form SS-8) that you can file to seek the Service's help in determining if your employee is correctly classified. Of course, if you believe that you have misclassified employees working as contractors, it might be a good time to contact your labor and employment attorney.