Independent Contractor (IC) misclassification claims can be confusing and costly for employers. The risks associated with IC misclassification are widespread, and an increasing number of federal and state agencies are focused on the issue. It is important for any company to understand these organizations and their roles in determining IC classification. In this article we’ll present an overview of the regulatory bodies at different governmental levels responsible for various aspects of IC misclassification.
Over half of the states have signed a Memorandum of Understanding with the US Department of Labor where the participating states may share IC misclassification information with other government bodies. If one government agency is alerted to a misclassification claim, the information may be shared with other government agencies. For example, if a worker files an unemployment claim in the state of California, the state unemployment office may notify the IRS and the IRS may conduct an audit of your business. One misclassification claim from one government agency can easily spiral into many claims from various government agencies.
The three federal agencies responsible for addressing worker misclassification claims are the Department of Labor (DOL), the Internal Revenue Service (IRS), and the National Labor Relations Board (NLRB).
Department of Labor
The DOL has two agencies that address IC misclassification claims: the Wage and Hour Division (WHD) and the Office of Workers’ Compensation Programs (OWCP). Recently, the DOL released the Administrator’s Interpretation of how to classify workers based on the Economics Realities Test.
According to the DOL’s website, “The Wage and Hour mission is to promote and achieve compliance with labor standards to protect and enhance the welfare of the Nation’s workforce.” If a worker is misclassified as an IC when they should be classified as a W2 worker, the worker may file a claim for minimum wage or overtime pay with the DOL. The WHD investigates claims of this nature. If a worker is found to be misclassified, the employer is responsible for paying back wages to the misclassified worker.
The Office of Workers’ Compensation Programs administers disability benefits programs to injured workers. If an independent contractor files a claim with the OWCP, then the worker’s IC status is called into question. Since ICs are not employees, they are not eligible for workers’ compensation benefits. If an IC is found to be misclassified by the OWCP, then the company is accountable for paying workers’ compensation benefits.
The National Labor Relations Board is a federal agency that “safeguard(s) employees’ rights to organize” and to “prevent and remedy unfair labor practices.” The NLRB takes a broad approach as to the types of claims they will investigate. A misclassified IC may make a claim that the company they contract with is treating them unfairly. The IC may think they are employees of the company and file a claim. If the NLRB finds the IC was misclassified and is in fact an employee, the business would be liable for a variety of penalties based on the unfair practice. The NLRB doesn’t use one specific test to determine IC classification, but rather relies on a variety of different tests.
The Internal Revenue Service is the federal government agency “responsible for tax collection and tax law enforcement.” The IRS may find IC misclassification through an audit, or through a claim from another government entity through a Memorandum of Understanding. If one worker is found to be misclassified, the IRS will investigate the company for any other workers who might also be misclassified. If the IRS determines a worker is misclassified, the company must pay back taxes with 9% interest, plus a penalty of 12%-35% of the tax bill per worker. The company would also be liable for any overtime or minimum wage. The IRS uses the Common Law test to determine IC misclassification.
State Workforce Agencies
At the state level, each state has their own government agencies that administer workers’ compensation, discrimination, unemployment, and other services to workers. Each state utilizes their own test for determining IC classification. The penalties will vary based on state and type of claim.
As an example of how confusing this can become, let’s take a look at New York. The state of New York addresses worker misclassification in a variety of ways. Under the guidance of the New York Department of Labor, New York has the Joint Enforcement Task Force on Employee Misclassification (JETF), which enables six New York state agencies to coordinate classification law enforcement and investigate misclassification claims. The JETF carries out its mission by sharing information between the agencies, making referrals to law enforcement, and organizing tasks among the member agencies.
Each of the six agencies tackle different facets of misclassification depending on their primary functions: The New York State Department of Labor; The New York State Workers’ Compensation Board; The New York State Workers’ Compensation Fraud Inspector General; The New York State Department of Taxation and Finance; The New York State Attorney General’s Office; The Comptroller of the City of New York.
Particularly, the New York State Department of Labor, one of the six agencies, has several divisions that handle labor issues: The Unemployment Insurance Division; The Division of Labor Standards; The Division of Safety and Health; The Office of Special Investigations; and The Bureau of Public Work. IC misclassification claims can be funneled from any of these divisions to any of the other divisions or agencies. When a misclassification claim arises, whether it is unemployment, disability, tax, Workers’ Compensation, or overtime, one agency may share information with all of the agencies, creating a potential costly web of issues for the business.
This is not an exhaustive list of agencies that investigate misclassification claims. There are a few other agencies where misclassification claims may arise such as The Equal Employment Opportunity Commission (EEOC) and Occupational Safety and Health Administration (OSHA). A single IC misclassification claim can quickly spiral out of control. The most risk adverse way to combat IC misclassification claims is to take a preventive approach to classifying your workers. Synergy Services’ Compliance Program offers comprehensive risk mitigation services to IC misclassification. We review each IC to determine the correct classification utilizing all IC classification tests.
|Agency||Test||Claim Types||Misclassification Penalties|
|Wage and Hour Division of DOL||Economic Realties||Minimum wage, overtime||Back wages|
|Office of Workers’ Compensation Programs of DOL||Varies by state (ABC, Common Law, or Economic Realities)||Worker compensation||Back payments, penalties|
|IRS||Common Law||Tax claims, unemployment||Back taxes, penalties, unemployment benefits, overtime, minimum wage|
|NLRB||Varies by case||Worker unfairness; unionization||Varies based on type of claim|
|State Workforce Agencies||Varies by state (ABC, Common Law, or Economic Realities)||Unemployment, discrimination, Workers’ Compensation, tax||Varies based on type of claim and state|