The classification of workers as independent contractors has been a focus of multiple federal and state agencies for at least the past two years. However, the September 19, 2011 announcement by the leaders of the U.S. Department of Labor, the IRS, and 11 state agencies that there will be a coordinated effort to fight misclassification signals a ratcheting up of the intensity. In justifying this program in these troubled economic times, these governmental entities have argued that worker misclassification is a widespread problem that cheats workers out of minimum wages and overtime pay and robs states of tax revenue. It also is expected that they will seek to hold a company liable for the sins of its subcontractors under a “joint employment” theory. The program will involve information-sharing between the agencies as well as coordinated enforcement.

While the government agencies have sold the initiative as “pro-business,” stating that it will place law-abiding employers on a level playing field with those who have been skirting the rules, the regulatory costs as well as the legal uncertainty posed by ambiguous standards, which vary by state, pose a challenge for employers concerned with cost-effective compliance. Recent state action also has upped the ante. For example, California just passed new legislation imposing strong monetary penalties for willful misclassification. In September 2011, Connecticut issued 28 stop work orders at construction sites for misclassification.

However, there are concrete steps employers can take to help mitigate the risk:

  1. Self-Audit: Take a hard look at any workers classified as independent contractors, especially those who were once employees of the company or who perform roles that are typically done by employees. Fix any problems.
  2. Do Not Control: While federal and state agencies use different standards, the control over how a worker performs his or her job is a prime indicator of an employment relationship.
  3. Consider the IRS Voluntary Classification Settlement Program: This program allows eligible employers the opportunity to reclassify some or all workers as employees without being subject to an IRS audit or penalties.
  4. Have the Courage of Your Convictions: Of course, it depends on the circumstances, but the legal status of independent contractors has been recognized for many years, and joint employment may be difficult to establish. Especially if the potential ramifications of reclassification are significant, a company may need to expend the resources to convince the government agency, or the court, that its classification decision is correct.