Jun 2010 , Vol. VI, No.1

Congress Seeks to Scrutinize Classification of Independent Contractors

Builders and Contractors Exchange
Weekly Bulletin: 1 june 2010

Congress Seeks to Scrutinize Classification of Independent Contractors
By: Heather Kofron and Tim Boykin

On April 22, 2010, legislators introduced the Employee Misclassification Prevention Act (“EMPA”) as H.R. 5107 and S.3254 in the House and Senate, respectively.  The EMPA seeks to provide benefits and protections to employees wrongly classified as independent contractors.  The act would also increase federal, state and local government revenue by promoting stricter adherence to tax laws.

EMPA Provisions

The EMPA amends the Fair Labor Prevention Act in two ways:

First, the proposed legislation aims to reduce the number of worker misclassifications.  The legislation thrusts new recordkeeping and notice requirements upon employers for both employees and non-employees.  The EMPA would impose penalties of up to $1,100 per incident for worker misclassification, or up to $5,000 per incident for repeated or willful violations.  The Department of Labor (“DOL”) would have to create an Employee Rights website, summarizing workers’ rights and allowing for online complaint submission.

Secondly, the EMPA would improve federal and state efforts in detecting and stopping worker misclassification.  The proposed law mandates several state actions in identifying misclassification.  The DOL would monitor these state efforts.  Further, the DOL and IRS would be permitted to refer misclassification violations to each other.

Employer Effects

Perhaps the most practical repercussion of the proposed law would be the additional administrative burden placed upon companies.  Managers will have to closely and carefully reevaluate their firms’ relationships with workers.  New recordkeeping requirements will necessitate more staff hours.  Of course, employers will also have increased costs for additional benefits accruing to any employees previously classified as independent contractors.   

Additionally, the law directs the DOL to conduct targeted audits of certain industries.  Increased interconnectivity between agencies and between federal and state governments would make being scrutiny more likely and penalties more costly.  While similar proposed legislation has not passed recently, Congress appears to be taking a stronger pro-worker stance.  For example, the Taxpayer, Responsibility, Accountability, and Consistency Act of 2009 (“TRAC”), also in committee, provides protections for independent contractors as well.  Employers should stay abreast of current legislative trends and be aware enhanced enforcement may come into effect.