USDOL Initiative to "Detect and Deter" Misclassification of Independent Contractors

The US Department of Labor (USDOL) will receive extra funding in FY 2013 to “detect and deter” the misclassification of independent contractors.  This would specifically include $14 million to combat misclassification, $10 million in grants for states to identify misclassification and recovery of unpaid taxes and $4 million to fund investigators at the USDOL Wage and Hour Division.

According to the USDOL, the misclassification of independent contractors is a serious problem for the affected employees, employers and to the health of the overall economy. Misclassified employees are often denied access to critical benefits such as health insurance, medical leave, and unemployment insurance. It also generates losses to the Treasury, Social Security, Medicare Funds, as well as to state unemployment insurance and workers compensation funds.  Construction workers are especially prone to misclassification abuses.

The USDOL and IRS believe some businesses take advantage of the fact that misclassifying employees as independent contractors result in a 20-30% cost savings per worker.  

The cost of withholding federal income, Social Security, Medicare and unemployment taxes along with the expense of employee benefits are difficult in a competitive market. Companies are reluctant in an uncertain economy to hire permanent employees and they will continue to hedge their bets with independent contractors regardless of legal ramifications.  

The Department of Labor Misclassification Initiative has also entered into a memorandum of understanding (MOU) between the USDOL and the Internal Revenue Service. Under this agreement, the agencies will work together and share information to curtail the incidence of misclassification, reduce tax gaps and the improve compliance with federal labor laws. The MOU is intended to “protect the rights of employees and level the playing field for responsible employers by reducing the practice conducted by some businesses of misclassifying employees”.