A BILL TO SEND MISCLASSYING EMPLOYERS THE BILL
While there has not been a specific law outlawing the misclassifications of employees as independent contractors, employers could be penalized for doing so by the IRS (since the proper withholding taxes would not have been paid), the Department of Labor (since overtime wages may not have been paid), or by Unemployment and Workers’ Compensation (seeking taxes and payments not previously made). A number of U.S. senators are looking to increase the consequences of misclassifications.
It’s easy to understand why employers might prefer to utilize independent contractors. There’s saving on the taxes paid on employee wages. There’s also no health insurance or 401(k) match, no paid leave, no unemployment insurance or employee’s compensation contribution, such as one would pay for an employee. The government, however, sees misclassification as taking money out of government coffers and out of employee’s pockets.
As a result, as Overtime Advisor previously reported, the government has been increasing enforcement of the existing rules about correctly classifying employees.
However, stepped-up enforcement of the existing rules is only part of the picture. There is also a bill currently pending before the U.S. Senate that would enhance protection against misclassification. The Payroll Fraud Prevention Act., introduced by a trio of Democratic Senators, is intended to prevent misclassification of employees as independent contractors, which the sponsors frame as issue of fairness and equity. They say that besides cheating the government and affected employees, misclassification also presents an uneven-playing field, with honest businesses forced to compete with ones that don’t pay their fair share.
Of course, talk is cheap—especially in Congress. How does the proposed bill actually aim to accomplish its goals? As drafted, it would put in place a system of record keeping and notice requirements, backed by fines and penalties, to compel compliance. Highlights include:
• Employers required to keep accurate records as to the classification of each employee
• Employees would have to be explicitly notified of their classification—and directed to a Department of Labor (DOL) website for information about employee rights
• Penalties ranging up to $5,000 per employee would be levied for notice violations or misclassification
• Triple damages would be imposed for willful (i.e. intentional or knowing) violations of minimum wage or overtime law resulting from misclassification
These penalties would be on top of the existing liability that employers face for violation of tax law or the FLSA, making misclassification a very expensive (as well as illegal) way to save money.
