The United States Department of Labor has announced that it will coordinate with the Internal Revenue Service as well as state officials in enforcing laws related to treatment of individuals as employees, rather than independent contractors. This represents yet another tactic or step being taken to deal with the problem of alleged employee misclassification and the revenue loss which it entails for the federal and state governments. The Solicitor of Labor, Patricia Smith, stated emphatically that it was a high priority, but any notice of proposed rulemaking on employee misclassification was “not imminent.”

The Solicitor asserted that “there will be a rule, in one form or another.” She opined that if rulemaking was in the cards, such a process would likely commence “ probably be in the spring” of 2011. She recommended that the DOL start a webpage on the issue; she stated that the agency “really wants to hear from people,” both on the employer and employee side of the aisle. She stressed that the comments would be taken “very seriously.”

The proposed rulemaking would mandate that before an employer classifies someone as an independent contractor, it would be compelled to undertake a written analysis, analyzing the various independent contractor factors and would need to retain that analysis for inspection/scrutiny by the government, as another official record (similar in nature to time records and payroll records). The rule would also require that certain payroll information (e.g. status) be set forth on the pay stubs given to these individuals.

There are also going to be increased cross-referrals on the misclassification issue; the DOL will share data with States and there will be a mechanism for joint enforcement. The DOL will also seek to change federal unemployment insurance regulations to facilitate a State’s efforts to more accurately target employers for unemployment misclassification audits, as opposed to the now virtually random audit system that reaches but 2% of employers on a yearly basis.

I have written many times about the increased agency emphasis (on a state and federal level) on employers who classify individuals as independent contractors. There are specific criteria that must be met under state and federal law, the burden of proof is on the putative employer and the natural, knee-jerk reaction by auditors, from any agency, is to classify people as employees. This interagency cooperation, on a federal and state level, bodes ill so employers must be ever more vigilant about classifying individuals because I am sure the penalty assessments will also be enhanced and that’s where the real money/danger will lie.