Misclassification Activity on the National Level
In August of 2009 the U.S. Government Accountability Office (GAO) issued a report recommending better cooperation and coordination among state and federal agencies in addressing employee misclassification. It recommended joint interagency effort between the IRS and the U.S. DOL, and within U.S. DOL agencies. The GAO also recommended that the Wage and Hour Division (WHD) increase its focus on the misclassification of employees, that OSHA and WHD share misclassification information with each other and with state agencies, and that U.S. DOL collaborate with the IRS to offer outreach and education to workers. The IRS has already begun a program of conducting 2000 randomly-selected audits focused on employment tax issues per year for the next three years.
Priority for the Obama Administration
Unquestionably, the change in administrations will have a significant impact upon misclassification at the federal level. The administration’s proposed FY 2011 Budget includes a joint Labor-Treasury initiative to strengthen and coordinate Federal and State efforts to enforce statutory prohibitions, identify, and deter misclassification of employees as independent contractors. The Department of Labor’s budget includes $25 million to support this initiative, comprised of:
- Wage and Hour Division. An additional $12 million and 90 FTE’s have been requested to focus on misclassification during targeted WHD investigations, supporting field investigator training activities and an additional 4,700 investigations. These investigations will be directed at industries with misclassification characteristics, such as construction, child care, home health care, grocery stores, janitorial, business services, poultry and meat processing, and landscaping.
- Employment and Training Administration. $11.25 million and 2 FTE’s have been requested for competitive grants to States to increase their capacity to focus on misclassification and reward the States that are most successful at detecting and prosecuting employers that fail to pay their fair share of taxes due to misclassification. There have been no details yet on the competitive state grants money, but we are watching closely with the thought that Maine will pursue a grant, either by itself, or perhaps in conjunction with other Northeast states.
- Solicitor of Labor. $1.6 million and 10 FTE’s have been requested to pursue misclassification litigation, including multi-State litigation to coordinate enforcement with States and leverage their groundbreaking work.
- Occupational Safety and Health Administration. $150,000 has been requested to modify training curriculum and investigation guidelines to allow inspectors to identify potential employee misclassification and share information with WHD.
Proposed Statutory Changes
In addition to funding for enforcement, Obama’s budget proposal includes statutory changes that would ensure the proper classification of employees. These proposals would:
- Shift Burden. The burden of proof would shift to employers to demonstrate that their workers are classified correctly.
- Close a Tax Loophole. The “safe harbor provision” would be eliminated. This loophole was created by Section 530 of the Revenue Act of 1978, which allows companies to indefinitely classify employees as independent contractors even when the government knows they are misclassified, so long as the company once had a reasonable belief that the workers were independent contractors.
- Make Misclassification a Violation of the FLSA. Misclassification would be a violation of the Fair Labor Standards Act, with appropriate penalties.
More Aggressive Enforcement
The US DOL’s new top enforcement official is Patricia Smith, Solicitor of Labor. Smith was NY’s labor commissioner for the past three years, where she was aggressively cracking down on misclassification.
Effects of the Federal Changes
We believe that these efforts to combat misclassification at the federal level, especially when coupled with Maine’s efforts, will have a significant impact upon on the misclassification problem in Maine.
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