Why it matters: The issue of independent contractor misclassification remains a hot topic for legislators and regulators alike. The recent introduction of federal legislation proposing penalties for such misclassification should reiterate for employers the importance of correctly classifying all employees. Scrutiny from regulators may also increase, as the Department of Labor continues to gather partners for its Misclassification Initiative, like the state of New York, which became the fifteenth state to agree to share information with the federal agency. And employers can be sure that the continuing governmental attention will certainly not be ignored by plaintiff’s attorneys.

Detailed Discussion

Battling the misclassification of independent contractors remains a priority for both legislators and regulators.

A group of senators – Robert P. Casey, Jr. (D-Penn.), Tom Harkin (D-Iowa), Sherrod Brown (D-Ohio), and Al Franken (D-Minn.) – recently introduced the Payroll Fraud Protection Act, S. 1687, a bill that would “hold employers accountable” for misclassification by establishing it as a violation of the Fair Labor Standards Act (FLSA).

The lawmakers noted the value of independent contractors to the United States workforce and bemoaned misclassification that leaves such workers without overtime benefits, minimum wage pay, and other benefits. In addition, misclassification can offer businesses an unfair leg up on competitors and costs the government millions in lost income, unemployment, and other payroll taxes, they said.

Pursuant to the bill, employers would be required to provide notice to all employees of their status as either an employee or independent contractor, direct them to a Department of Labor (DOL) site for more information about their rights, and provide contact information for the DOL if the employee “suspects [they] have been misclassified.”

If the employer fails to provide such notice, the legislation creates a presumption that a worker is an employee. Civil penalties are available for violations of the law, ranging from $1,100 for a first offense up to $5,000 for a second or willful violation.

The proposed law also includes an anti-retaliation provision prohibiting employers from discharging or discriminating against workers based on their opposition to a practice regarding their own classification.

Other changes would authorize information sharing between the DOL and the Internal Revenue Service (IRS) and require the DOL to measure performance by each state with regard to misclassification.

In regulatory news, the DOL announced a joint enforcement effort with the state of New York to ensure appropriate employee classification, making it the fifteenth state to agree to share information with the agency. Pursuant to the memoranda of understanding, the DOL, the New York State Labor Department, and the New York State Attorney General’s Office will now be working together.

Similar agreements are in place with California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah, and Washington.

The information sharing with states has helped the Wage and Hour Division recover more than $18.2 million in back pay for almost 20,000 employees who had been incorrectly classified as independent contractors, the DOL said.

To read S. 1687, click here.