Worker Classification Investigations Gain Momentum



Posted: Thursday, November 12, 2009

by Crystal O'Brien
MMC Inc.

Currently, one of the fastest growing areas of litigation, including class action suits, is in the proper classification of workers as either employees or Independent Contractors. The dictionary defines an Independent Contractor as "a person who contracts to do work for another person according to his or her own processes and methods; the contractor is not subject to another's control except for what is specified in a mutually binding agreement for a specific job." Misclassifying a worker as an Independent Contractor can have far reaching implications including high dollar liabilities.

The Internal Revenue Service (IRS) has very strict criteria for determining the Independent Contractor vs. Employee status that has been in place for many years (discussed later in this article). Federal Express has been a poster child for this issue, owing the IRS $319 million in back taxes. In a suit filed against Northwestern Mutual Life Insurance Company, the proposed class is seeking $200 million for misclassified workers.

At the federal level, the IRS is in the midst of a misclassification crackdown. It is important to note that on the Federal level there has been previously proposed federal legislation - the Independent Contractor Proper Classification Act - that is expected to be revisited by Congress. This act imposes strict penalties on employers for worker misclassification. A brief summary of the act is below;

Independent Contractor Proper Classification Act of 2007 - Amends the Revenue Act of 1978 to: (1) require employers to treat workers misclassified as independent contractors as employees for employment tax purposes upon a determination of misclassification by the Secretary of the Treasury; (2) repeal the ban on Treasury regulations or revenue rulings on employee/independent contractor classifications; and (3) eliminate the defense of industry practice as a justification for misclassifying workers as independent contractors.



In addition to the Federal Act discussed above, many states have current or pending legislation of a similar nature. Some examples are;

You might be wondering at this point: what's the big deal is if a worker is classified as an Independent Contractor or an employee? Workers that are misclassified as independent contractors are denied many protections afforded to employees including, but not limited to, wage & hour laws, benefits (including workers compensation and unemployment insurance payments), and protection under non-discrimination laws.

Thomas E. Perez, Secretary of Maryland, offered this quote on regarding Maryland's Workplace Fraud Act, "This new law will ensure that employers who attempt to cheat the system, their workers and their competitors, will pay a steep price for their actions. It should send a message that we will be fair to those employers who are trying to play by the rules, but we will not tolerate flagrant and intentional violations of the law for personal gain."

Both the federal and state governments are recognizing that in many cases employers intentionally misclassify workers as Independent Contractors in order to avoid payroll tax liabilities, workers compensation premiums, and/or wage & overtime responsibilities on these workers. The IRS estimates that the federal lost tax revenue for misclassified workers as $3 - $5 billion (yes, billion) dollars per year. It is estimated that 7 15% of workers are misclassified as Independent Contractors.

As you can imagine, there are many federal and state entities that have an interest in the misclassification of workers:

The penalties for misclassification include civil fines, criminal penalties, being barred from federal and/or state contracts, and private rights of action for the aggrieved workers.

To determine if a worker is an Independent Contractor can be challenging, especially since there are different criteria for the various federal and state entities mentioned above. Even though there are different tests, most tests flow from the long established principles of the IRS. The IRS employs a 20 Factor Test that determines the employers level of control in these categories: Behavioral, Financial and Type of Relationship. Please see the links below for more information and guidance on properly classifying workers.

Crystal M. O'Brien, Esq. serves as MMC's Employment Law Manager/Corporate Counsel. After receiving a double-degree in psychology and sociology from Oberlin College in 1988, Ms. O'Brien earned a workers' compensation insurance claims adjusting license in 1991. She completed post-graduate studies in Human Resources Management at Portland State University's Graduate School of Urban & Public Affairs from 1996-1998 and earned a Juris Doctorate and Certificate in Dispute Resolution from Willamette University College of Law in 2001. Immediately following law school, Ms. O'Brien served as a judicial clerk to the Honorable Faith Ireland (ret.) of the Washington State Supreme Court. She is licensed to practice law in California Washington as well as before U.S. District Courts in each state. Collectively, Ms. O'Brien has 19 years of litigation experience.

To view her complete bio click here.

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