Working: U.S. and local governments crack down on employers who pay workers as contractors

October 9, 2011

If your independent contractors clock in and follow your instructions for completing their tasks, maybe you’re requiring too much of them. Maybe they should be considered employees and not independent contractors, government labor experts say.

The federal government as well as states, including Maryland, are cracking down on employers who treat what should be workers as contractors. Governments are losing millions of dollars in payroll tax and other revenue and workers are losing benefits, including Social Security, health care and unemployment insurance.

Getting the classification right is important, labor experts say, because if found guilty of misclassifying workers a business can be fined thousands of dollars and required to pay thousands more in back wages to the worker.

An employer who misclassifies workers as contractors “has a competitive edge,” said Richard A. Sebeck, program manager for the Maryland Department of Labor, Licensing and Regulation’s Division of Labor and Industry. “It’s bad for all honest businessmen.”

Moreover, employees misclassified as contractors, Sebeck added, who “get hurt on the job can’t get workers compensation. If they’re laid off, they may not be entitled to unemployment” benefits.

In 2009, Maryland enacted a law targeting employers in the construction field who misclassify workers as independent contractors. Since then, the state has started investigations in about 450 cases. The U.S. Labor Department and the Internal Revenue Service also are joining forces to step up enforcement in a wide array of industries.

The efforts come as businesses are increasingly turning to independent contractors or freelancers to save money or avoid hiring staff who may end up being let go a few months later. Various government agencies have estimated that 20 to 35 percent of all employers have mistakenly or intentionally classified people as independent contractors when they really should be on staff.

Nancy Leppink, deputy director of the U.S. Department of Labor’s Wage and Hour Division, said misclassifying workers already is “more pervasive” than it has been before, and it has jumped from the construction and home building industry to restaurants, health care and government contractors.

“We’re being proactive and launching directed investigations. We target a variety of industries where we have problems,” Leppink said, including one aimed at the hotel and motel industry and another targeting home builders.

“The penalties for this misclassification is so severe that every employer is wise to consider it,” said Frank Vaszquez, a partner at the District-based Case & White law firm who works with employers on international business and employment law. Employers could be expected to pay back payroll taxes, plus unemployment insurance and also any overtime owed if their contractor really is an employee, and files a complaint.

Vasquez suggests employers hire contractors through a temporary employment agency. That’s what White & Case and most law firms do when they have a huge case to prepare for and need some young lawyers to review documents. “It’s a defined period of time and a defined project” and that makes it right for a short term contractor or temp, he said.

Since 2009, the Labor Department has collected more than $9 million in back wages for 15,000 workers in cases primarily involving misclassification of independent contractors. Just last month, the Labor Department and the IRS signed a memorandum of understanding to share information and coordinate law enforcement efforts; 11 states including Maryland, also are collaborating on law enforcement efforts.

If small businesses discover that one of their independent contractors really belongs in the employee category, they should make the switch immediately, Leppink said. They should find out if any back pay is owed — checking for overtime and minimum wage — and then put workers on the payroll, she added.

If they fail do do that, they could be subject to fines by multiple jurisdictions.

While Virginia has a state code that requires employers to spell out compensation for independent sales representatives in writing, it mostly follows federal laws on independent contractors versus workers.

Of the 450 complaints filed on construction and landscape crews in Maryland, currently 290 are considered open cases under investigation.

Tip sheet
Legal resources

Here are some resources to read up on independent contractor laws and requirements:

- If you want to know more about the Fair Labor Standards Act, which covers public and private workers, the Labor Department has a variety of compliance assistance materials at www.dol.gov .

- IRS regulations on independent contractors or staff job include Web pages, an online workshop and PDFs can be found at www.irs.gov .

- Maryland’s independent contractor law is outlined at www.dllr.state.md.us.

- Virginia’s labor laws are offered at www.doli.virginia.gov .

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