U.S. Department of Labor Intends to Increase Investigation and Prosecution of Businesses That Misclassify Employees as Independent Contractors
In the February 1, 2010 budget proposal for the 2011 fiscal year, President Obama has recommended awarding the U.S. Department of Labor (DOL) $25 million for the specific purpose of investigating and prosecuting employers who misclassify employees as independent contractors. Businesses that rely on independent contractors to ensure the efficiency, flexibility, and profitability of their enterprises are likely aware of the recent increased focus by the federal government, and many state governments, on this issue. This trend is certain to continue.
According to the DOL’s budget proposal, a majority of the allocated funds would be used to hire approximately 100 new full-time investigators to focus specifically on the discovery and prosecution of misclassification claims. It would also award monetary grants to the states that are most successful at addressing and remedying misclassifications. One novel proposed use of the funds is for the training of Occupational Safety and Health Administration (OSHA) inspectors on how to identify potential employee misclassifications. Information collected by OSHA inspectors would be communicated to the DOL Wage and Hour Division, which could conduct a thorough misclassification investigation.
Finally:
…the budget proposes legislation to ensure the proper classification of employees by: (1) shifting the burden of proof to employers to demonstrate that their employees are classified correctly, (2) closing the loophole created by Section 530 of the Revenue Act of 1978, and (3) making misclassification a violation of the Fair Labor Standards Act, with appropriate penalties. [FY2011 Department of Labor Budget in Brief at 2.]
The above-quoted portion of the budget proposal is consistent with a bill proposed by then Senator Obama in the 110th Senate (S. 2044). Even if the $25 million award to the DOL for misclassification investigations and prosecutions does not end up in the budget passed by Congress, businesses that rely on independent contractors in their operations should take this proposal as a clear signal that misclassification issues will continue to be a priority for the DOL and the White House. Misclassification violations can lead to significant cost in terms of backpay awards, penalties, and legal defense fees. Contractors and other businesses should take the time now to audit their independent contractor relationships to minimize exposure to misclassification claims.