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Misclassification Missteps: Know Who Your Employees Are

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The U.S. Department of Labor (DOL) announced its “Misclassification Initiative“ in September 2011, and with President Obama’s re-election to his second term, employers should be aware of the continued federal and state enforcement efforts under way to ensure that employees are not being misclassified as independent contractors.

Along with the DOL’s Misclassification Initiative, came a Memorandum of Understanding (MOU) between the DOL and the Internal Revenue Service (IRS). According to the DOL, “under this agreement, the agencies will work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.”

The DOL is actively pursuing MOUs with states as well. Currently 13 states have signed such MOUs. Additionally, some states are enacting separate legislation that addresses misclassification, such as Pennsylvania’s Construction Workplace Misclassification Act, which targets specific industries where legislators believe misclassification is more likely to occur.

The correct use of independent contractors can undoubtedly contribute extensively to an employer’s operations and bottom line. Independent contractor use has always involved some risk but with state and federal governments both searching for ways to increase tax revenues in these hard economic times, the risks of using independent contractors continues to increase. In lawsuits across the nation, workers argue that they have been misclassified as independent contractors and deprived of employee benefits.

While determining whether a worker is an “independent contractor“ or an “employee“ is a very fact-specific analysis, employers should review their use of independent contractors and ensure that their workers are correctly classified.

The Association’s Legal Services Division can assist you with a variety of employment law issues. Please contact me at 814/833-3200, 800/815-2660 or tlamary@mbausa.org for more information.