Turning Up the Heat on Worker Misclassification

If you’ve come anywhere near an HR newsletter in the last six months, you know there’s a big crackdown in progress targeting misclassification of employees as independent contractors.  The heat has risen to the point where one piece of pending legislation would make misclassification a federal offense regardless of whether the infraction was intentional or not.

Why do the IRS and DOL have their collective knickers in a bunch over misclassification?

It all comes down to simple economics.  Federal and state tax revenues are down.  Not a good thing if you’re in charge of balancing budgets.  Meanwhile, non-compliance with IRS and DOL regulations governing which workers are classified as W-2 employees versus 1099 contractors is going up.  This equates to fewer tax dollars coming from employers without a corresponding increase in tax revenues from independent contractors.

Combine this with historic federal and state budget deficits, and you’ve got a recipe for stepped up surveillance and enforcement.  Witness two recently introduced bills:  The Payroll Fraud Prevention Act, and The Employee Misclassification Prevention Act.  Both bills are still in committee, but they underscore how much attention this issue is getting in Congress.

Still not convinced this iron is hot? Allow me to remind you about the widely announced partnerships between the IRS, DOL, and several state agencies who are now sharing employer information with the goal of tracking down practitioners of worker misclassification.