Independent Contractor or Employee? New Legislation Focuses on Ending Employee Misclassification

On October 13, 2011, legislation was reintroduced in the House of Representatives which would seek to end the practice of employee misclassification.  Supporters claim that employers misclassify employees as independent contractors to save on costs by denying them benefits and protections such as workers’ compensation, the right to organize, and minimum and overtime wages.  Supporters also claim that this practice puts responsible employers at a competitive disadvantage.

Rep. Lynn Woolsey and Rep. George Miller, both California Democrats, heavily support the legislation which is titled The Employee Misclassification Prevention Act (“EMPA”).  Both Representatives cite that the Internal Revenue Service estimates that close to $3 billion in tax revenue is lost annually due to misclassification.  Furthermore, Woolsey claims that an estimated 30 percent of U.S. companies misclassify employees.

The EMPA would amend the Fair Labor Standards Act by requiring employers to keep records of workers regardless of their classification.  The EMPA would also provide a penalty for employee misclassification.  If enacted, the EMPA would:

            – Require employers to notify workers of their classification status.

            – Require companies to keep records of those workers who perform services or provide labor to the employer but are not classified as employees.

            – Provide a maximum penalty of $1,100 for first time violators and $5,000 for    repeat offenders who misclassify workers.

            – Establish a website that would notify workers of their rights and allow them     to file complaints online.

            – Create a reciprocal relationship between the IRS and DOL where each agency           could report employer violations to the other.

            – Allow the DOL to perform specialized audits of industries where         misclassification is a common occurrence.

            – Provide anti-retaliation protection for workers who claim they are inaccurately classified.

It is unclear whether this Bill will gain enough support to become law.  Currently, however, employers must be certain to classify its workers in accordance with the Fair Labor Standards Act.  Employers concerned about whether their independent contractor workers could be deemed to be employees should seek legal advice.

For more information, please contact Patrick Peters at ppeters@beneschlaw.com or (216) 363-4434.