Proposed Federal Legislation Seeks to Remedy and Penalize Worker Misclassification

April 27, 2010

On April 22, 2010, Sen. Sherrod Brown (D-Ohio) introduced legislation that seeks to amend the Fair Labor Standards Act (FLSA) and Social Security Act with the goal of preventing and penalizing employers from misclassifying workers as independent contractors as opposed to employees.

The bill, titled the Employee Misclassification Protection Act, is co-sponsored by Sen. Tom Harkin (D-Iowa), Sen. Patty Murray (D-Wash.), Assistant Majority Leader Sen. Richard Durbin (D-Ill.), Sen. Robert Casey (D-Pa.), and Sen. Jeff Merkley (D-Ore.). Rep. Lynn Woolsey (D-Calif.) has introduced an identical bill in the House of Representatives. Secretary of Labor Hilda Solis responded to the bill by “applauding” Sen. Brown’s and Rep. Woolsey’s “efforts to address this significant and troubling issue.”

The proposed legislation amends the FLSA by introducing additional recordkeeping and other requirements for employers. The bill requires employers to provide written notice to each individual whom they have hired or retained as an independent contractor. The notice is to:

  • Advise each individual of his or her classification.
  • Direct the individual to the Department of Labor’s (DOL) website established for providing additional information about the rights of employees under the law.
  • Provide the address and telephone number for the local DOL office.
  • Provide additional notifications as set forth in the statute and as prescribed by regulations to be issued by DOL.

Employers would be required to comply with the bill’s notice requirements within six months of the effective date of the bill, and at the time of hire or engagement thereafter. The legislation also creates a rebuttable presumption that individuals paid for their services are employees if the employer fails to satisfy the act’s recordkeeping and notice requirements. That presumption may only be rebutted upon a showing of clear and convincing evidence to the contrary.

The act would also prohibit employers from retaliating against employees who oppose their classification as an employee or independent contractor or file a complaint with an appropriate agency with respect to their classification. Employers who violate the bill would be subject to civil penalties for each employee or individual who was the subject of the violation of $1,100 or $5,000 for repeated willful violations and liquidated damages under the FLSA. It also permits DOL’s Wage and Hour Division to report incidents of worker misclassification to the IRS as it deems appropriate, and directs the Wage and Hour Division to conduct targeted audits of industries that frequently misclassify employees.

The proposed legislation follows the Taxpayer Responsibility, Accountability and Consistency Act, introduced by Sen. John Kerry (D-Mass.) in late 2009, which was designed to eliminate the safe harbor provision for worker misclassification provided by Section 530 of the Revenue Act of 1978. See Proposed Legislation Likely to Classify More Workers as Employees. See also Legislation Proposed to Modify Rules Regarding Employers’ Classification of Individuals as Independent Contractors.

In addition to the proposed federal legislation, several states including New York and Connecticut have introduced legislation intended to remedy worker misclassification issues. See NY Legislation Would Presume Construction Workers are Employees.

Moreover, President Obama’s Fiscal Year 2011 budget requests $25 million for a multiagency initiative to strengthen and coordinate federal and state initiatives to identify and deter worker misclassification. Additionally, the budget requests an additional $12 million and 90 new investigators for the Wage and Hour Division to strengthen its efforts to ensure compliance with worker classification requirements among other initiatives.

In each case, the sponsors of the proposed worker misclassification legislation, and DOL in discussing the FY 2011 budget, have identified two principal motivating factors in addressing this issue: (1) protecting workers wrongly denied Social Security, unemployment, and workers’ compensation benefits, as well as other workplace protections, by improperly being classified as independent contractors; and (2) increasing tax revenue by requiring employers to withhold payroll taxes from individuals who have heretofore been improperly classified as independent contractors.

The federal and state governments have already increased their focus on worker classification with increased examinations by taxing authorities and unemployment commissions. Congress and state legislatures are also weighing in by proposing legislation that will make it more difficult to successfully classify a worker as an independent contractor, and more costly if such a classification is incorrect. Accordingly, employers should carefully consider whether classifying new workers as independent contractors is appropriate and review their current classifications.