Earlier this month, the US Department of Labor, the Internal Revenue Service, and 11 states announced that they were taking an important step toward stemming the practice of misclassifying workers as independent contractors, which robs workers of pay and benefits and puts those who follow the rules at a competitive disadvantage.
According to a press release from the Department of Labor, the two federal agencies and the states signed memoranda of understanding to improve communication and coordination to “end the business practice of misclassifying employees in order to avoid providing employment protections.”
Misclassifying workers as independent contractors, which some employers do to avoid minimum wage and overtime laws and paying for benefits such as Social Security, workers’ compensation, and unemployment insurance, is especially prevalent among home builders, hotels, restaurants, janitorial contractors, health care companies, and day care facilities.
Earlier this year, the Department of Labor (DOL) recovered more that $219,000 in back wages for 44 workers at two Boston-area restaurants that misclassified staff as independent contractors.
The National Employment Law Project (NELP), which for a long time, has advocated for more aggressive enforcement against misclassification violations, said that the problem is growing. In a 2010 letter to congressional leaders, NELP Executive Director Christine Owens wrote,
Genuine independent contractors constitute a small fraction of the American workforce—by definition, an “independent contractor” operates a business—but the number of workers misclassified as independent contractors is large and growing. According to the Government Accountability Office, 15 percent of employers misclassify their workers as independent contractors, denying worker protections and benefits to at least 3.5 million workers a year.
The memoranda of understanding will improve the flow of information between the two federal agencies and the states that signed a memorandum.
The memorandum between the Department of Labor and the IRS enables DOL to refer wage and hour investigation information to IRS, which can use the information to pursue tax fraud charges against offending companies. IRS will provide DOL with information that can be used as evidence when DOL pursues wage and hour and other labor law violations.
States that signed a memorandum of understanding also agreed to share and receive information with and from the federal agencies. Minnesota is one of the states that agreed to the cooperation effort. Minnesota’s labor commissioner Ken Peterson told Twin Cities.com that the state has been trying for years to crack down on misclassifications because they hurt more people than those directly affected.
“Tens of millions of dollars are lost each year in workers’ compensation premiums alone that should help fund the workers’ comp program,” Peterson said. “Other employers end up picking up the tab for these guys.”
In addition to Minnesota, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Missouri, Montana, New York, Utah, and Washington signed a memorandum with the federal agencies.
Speaking at a ceremony announcing the agreements, DOL Secretary Hilda Solis told the audience, “We’re here today to sign a series of agreements that together send a coordinated message: We’re standing united to end the practice of misclassifying employees. We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike.”
When a prime contractor uses an IC, the IC should be paid appropriate overhead, especially since the prime often bills the customer. In many cases, when reasonable overhead is factored in, the ICs are expected to work for less than minimum wage. My local newspaper, the Inland Valley Daily Bulletin, did an expose of itself and its delivery contractors, who were doing well to net $5/hour after expenses.