Hunton Employment & Labor Perspectives

Government agencies are being urged to step up their efforts to address the potentially widespread problem of improper classification of workers as independent contractors, according to a recent study by the United States Government Accountability Office (GAO).  In a 70-page document, the GAO concluded that the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) have not sufficiently focused on misclassification in the past, and that they have not consistently assessed penalties against companies found to have improperly classified workers.

The GAO conducted the study to examine: the extent of misclassification of workers as independent contractors; actions the DOL and IRS have taken to address the issue, including coordination of efforts; and options that could help address the issue.  Among the reasons noted for conducting the study were the need to ensure that workers “receive the protections and benefits to which they are entitled” and that employers pay all required taxes.

The report identified a number of options to address the issue, almost all of which would have a significant impact on companies who use outside contractors:  clarify the distinctions between employees and contractors under federal law; allow workers to challenge classifications in U.S. Tax Court; define misclassification as a violation of the Fair Labor Standards Act; narrow the “safe harbor” provisions in Section 530 of the Tax Code for misclassification; require service recipients to withhold taxes for contractors; improve compliance programs; and enhance coordination between agencies for enforcement and sharing of data.

The GAO report undoubtedly portends greater activity on the part of the DOL and IRS with respect to enforcement of existing laws, and possibly new legislation on the part of Congress.  Bills addressing this issue were introduced in the previous session of Congress but did not reach a vote.  They are likely to be re-introduced sometime in the near future.

This is a loud and clear wake up call for all businesses that use contract workers to review their arrangements with legal counsel and ensure:  (1) that workers classified and paid as independent contractors will not be deemed employees under applicable labor and tax laws; (2) that proper documentation is in place to maximize the likelihood of a favorable outcome in the event of an audit or other challenge; and (3) that potential exposure is addressed with respect to back pay for minimum wage, overtime, liquidated damages, unpaid taxes, and penalties in the event of a finding of misclassification.

The Labor and Employment Team at Hunton & Williams has a task force focusing on issues related to joint employment, contingent workforces, and independent contractor relationships.  We would be glad to provide a copy of the GAO report and to provide guidance on this important topic.