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Legislation that would prevent employers from improperly classifying employees as "independent contractors" in order to avoid paying them overtime and benefits was introduced May 21, 2008, by Representative Rob Andrews (D-NJ), chairman of the House Education and Labor Committee's Subcommittee on Health, Employment, Labor and Pensions. Called the Employee Misclassification Prevention Act (H.R. 6111), the proposed bill would clarify that such misclassifications are a prohibited under the Fair Labor Standards Act (FLSA).
"The egregious practice of misclassifying workers as independent contractors needs to end," said Representative Andrews. "The Employee Misclassification Prevention Act is pro-employee, pro-employer and pro-taxpayer. The bill will protect employee benefits, remove incentives for employers to misclassify their workers, and ensure that bad employers don't line their own pockets with unpaid payroll taxes."
According to a May 8, 2007, Government Accountability Office report, Employee Misclassification -- Improved Outreach Could Help Ensure Proper Worker Classification (website), in 2005, there were 10.3 million independent contractors. The number of independent contractors in the total employed workforce grew from 6.7 percent in 1995 to 7.4 percent in 2005. The report explains that when employees are misclassified as independent contractors, they may be excluded from coverage under key antidiscrimination, leave and labor standards laws designed to protect workers and may not have access to employer-provided health insurance coverage and pension plans. Moreover, misclassification of employees can affect the administration of many federal and state programs, such as payment of taxes and payments into state workers' compensation and unemployment insurance programs.
A separate Massachusetts study found that 11.4 percent of the state's construction workers had been misclassified as independent contractors between 2001 and 2003. Similarly, an Illinois study found that misclassification had increased by 55 percent between 2001 and 2005.
Aside from clarifying that misclassifications are a prohibited act under the FLSA, the proposed bill would also increase penalties under appropriate circumstances and require the US Department of Labor and the states to work together to better detect misclassification. In addition, the bill would: (1) require employers to designate on their employee's records whether they are an "employee" or "independent contractor;" (2) require employers to notify workers of that classification and their right to challenge it; and (3) require state unemployment insurance agencies to audit employers to identify employers who are misclassifying employees. The Department of Labor and Internal Revenue Service would also be required to share information on cases where employers misclassify workers. In addition, the proposed bill would mandate that the Department of Labor perform targeted audits focusing on employers in industries that frequently misclassify employees.
Of note, on April 15, Representative Jim McDermott (D-WA), chairman of the Income Security and Family Support subcommittee of the House Ways and Means Committee, introduced H.R. 5804, The Taxpayer Responsibility, Accountability, and Consistency Act. The bill would remove a loophole allowing businesses to bypass the Internal Revenue Service's test of whether a worker is an employee or an independent contractor. It also would require businesses to give the IRS information about large payments to independent contractors. Under current law, a business is required to pay taxes and withhold income tax on the wages of all of its employees. But there is no such requirement for services a business receives from a person considered an independent contractor. The financial hit to the economy is dramatic.
The Internal Revenue Service found, in its most recent comprehensive review, that 15 percent of employers misclassified 3.4 million employees as independent contractors. (Nearly 2 million workers were found to be misclassified in just four states that recently studied the problem: Illinois, Maine, Massachusetts and New York.) This misclassification cost the Treasury billions in lost revenue, but the damage is much more severe. Misclassification dishonestly and artificially lowers costs for an unscrupulous business and puts all the honest businesses that abide by the rules at a competitive disadvantage. Furthermore, misclassification deprives workers access to the workplace protections and benefits they are entitled to under the law.
Labor backs the bill. Change to Win executive director Greg Tarpinian applauded Andrews proposed bill, stating that the legislation "will go a long way to prevent and redress theft by unscrupulous companies that misclassify their employees as independent contractors in order to deny them legal wages and benefits." He said "[p]assage of this worker rights legislation, combined with the Taxpayer Responsibility, Accountability, and Consistency Act introduced last month that takes aim at tax avoidance by employers that misclassify their workers, would constitute a double-barreled solution to this insidious and growing abuse."
Tarpinian continued: "Workers who are misclassified are cheated out of their basic rights to minimum wage and overtime pay, as well as unemployment insurance and workers' compensation. Misclassification allows low-road employers to undercut and underbid responsible employers. And every year, all levels of government are cheated out of billions of dollars in revenue, which means law-abiding employers and taxpayers end up paying more than their fair share."
Echoing Tarpinian's remarks, International Brotherhood of Teamsters General President Jim Hoffa said: "It also forces taxpayers to make up the difference when employers avoid paying payroll taxes by misclassifying workers."
For more information on this and other topics, consult CCH Employment Practices Guide or CCH Labor Relations.
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