The Department of Labor and IRS Continue to Examine Worker Classification Issues

November 29, 2010

Ensuring that employers properly classify their workers remains an important issue for both the Department of Labor (DOL) and the Internal Revenue Service (IRS). Recently, a high-ranking DOL official noted that her agency and the IRS are working together with state agencies to address problems related to worker misclassification – improperly labeling certain workers as independent contractors when they are actually employees.

To address worker misclassification problems, DOL is considering issuing additional regulations implementing the federal Fair Labor Standards Act (FLSA). Such regulations would potentially require employers to perform a classification analysis of certain workers they retain to determine whether the worker is an employee or independent contractor. The employer would also be required to provide the outcome of that analysis to the worker and retain that analysis as a part of its recordkeeping requirements under the FLSA in event of a DOL audit.

In addition to considering new regulations, the DOL also supports certain legislative attempts at addressing worker misclassification.  See, e.g., White House Backs Worker Classification Bill; Proposed Federal Legislation Seeks to Remedy and Penalize Worker Misclassification; Proposed Legislation Likely to Classify More Workers as Employees.  Additionally, DOL is closely examining less traditional business models such as franchises to get a better understanding of the worker misclassification issues associated with them.  IRS and DOL are also discussing a cross-referral relationship in which IRS would, among other things, share certain audit data to allow DOL to better target various industries and geographic areas for enforcement.

As noted above, DOL is also coordinating its efforts with various state agencies. Among its initiatives, DOL intends to amend federal unemployment insurance regulations so that it is easier for states to target its unemployment insurance audits for worker misclassification. States and the federal government are also setting up regional joint enforcement task forces to further share information, uncover and prevent worker misclassification.

Aside from intending to protect workers, the goal of these efforts is to increase tax revenue to the federal and state governments. These efforts also present an area of concern for employers that have designated some of their workers as independent contractors. Employers should ensure that they have classified their workers correctly, and employers may want to reexamine the classification of their workers as independent contractors if they have any doubt whether the workers qualify as such.

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