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Putting the Money Where Its Mouth Is: DOL Funds 19 States' Independent Contractor Misclassification Crackdown

On September 15, the U.S. Department of Labor announced its award of $10.2 million in grants to 19 states to aid in their worker misclassification detection and enforcement efforts in unemployment insurance programs. Ohio is not a grant recipient, but our next door neighbor, Indiana, is receiving a hefty sum of $500,000.

The money is meant to help state unemployment agencies discover situations where employers are misclassifying employees as independent contractors, which typically means the employer is not reporting the individual's compensation to the agency. The states chosen to receive the grants will use them to improve audit and education programs - all meant to eradicate misclassification.

State programs aimed at reducing worker misclassification are not new, but the money from the DOL to help is. The grants were authorized in The Consolidated Appropriations Act of 2014. The President's 2015 fiscal year budget highlighted the funding, stating that:

"When employees are misclassified as independent contractors, they are deprived of the benefits and protections to which they are legally entitled, such as minimum wage, overtime, unemployment insurance, and anti-discrimination protections. Misclassification also unfairly disadvantages businesses who comply with the law and costs taxpayers money in lost funds for the United States Treasury, and in Social Security, Medicare, the Unemployment Trust Fund, and State programs. The Budget includes nearly $14 million to combat misclassification, including $10 million for grants to States to identify misclassification and recover unpaid taxes and $4 million for personnel at [the DOL's Wage and Hour Division] to investigate misclassification."

President Obama's ongoing funding commitment has allowed the DOL to step up its efforts to uncover and abate independent contractor misclassification each year, as well as increase its level of enforcement coordination with other federal and state agencies in this same endeavor. This misclassification "crackdown" really started in earnest three years ago when the DOL got the ball rolling by signing a Memorandum of Understanding with the IRS to improve the agencies' coordination on independent contractor misclassification compliance and education. This was an unprecedented joint initiative of the two federal agencies that focused on information sharing and other collaboration headed by a joint IRS-DOL team.

The states have been following suit. Since 2011, some 15 states have signed a Memorandum of Understanding with the DOL, OSHA and other federal agencies in which the parties pledge a commitment to sharing information about individuals that have been misclassified as independent contractors. The end result, it is apparently hoped, is a domino effect whereby each state or federal agency that could receive payment as a result of a misclassification will have an opportunity to piggy back on the original agency's finding and initiate its own audit of the employer striving for the same result. In addition to this, half of the U.S. states have passed laws aimed at decreasing independent contractor misclassification through heightened penalties, more stringent legal tests for determining independent contractor status, information sharing among state agencies, and joint task force programs.

It only takes one disgruntled independent contractor to contact one agency to wreak the proverbial havoc. Perhaps the "IT consultant" makes an on-line claim for unemployment benefits after her services were abruptly terminated. Maybe the "independent sales rep" who applies for an internally posted position is rejected, so he turns around and contacts the IRS requesting an SS-8 determination (to determine if he was really an employee and, as such, regular payroll withholdings and contributions should have been made). Such singular contacts by just one unhappy "consultant" can open a business up to what amounts to a class action suit. This is because each agency that determines that an individual has been misclassified as an independent contractor will demand that the business rectify the situation (i.e., pay) not only for that one individual but for anyone else performing the same or similar role at that business who has also been, necessarily, misclassified as an independent contractor. And, even if the business remedies the situation to that agency's satisfaction, since that agency previously signed a pledge with other state and federal agencies to share its findings on misclassification, the inquiry could begin anew, over and over again, until the last agency has had its fill.

Properly classifying an individual as an employee versus independent contractor is an entailed process and subject to, at a minimum, its own article (and discussion with experienced employment counsel). Suffice it to say that having an independent contractor agreement in place is not enough - and such an agreement may even be disregarded altogether by the auditing agency. Thus, it is of critical importance now more than ever that businesses take the time to thoroughly analyze the anticipated role of, and relationship with, any individual whom the company seeks to engage as an independent contractor.

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