Top 3 Reasons Proper Worker Classification is Important

With profits in many industries still lagging, some companies are looking for ways to lower their payroll expenses. Some try to save on employment taxes by classifying workers as "independent contractors" or "consultants" rather than employees, while others try to save on overtime by classifying workers as "exempt" rather than "non-exempt." That's fine — as long as the classifications conform to the Fair Labor Standards Act (FLSA) and state wage-and-hour laws. But these companies should keep in mind that federal and state governments have set their sights squarely on worker-misclassification detection and enforcement, and improper worker classification is riskier than ever for employers.

1. Internal Revenue Service audits. In 2010, the IRS launched a three-year National Research Program to evaluate employer compliance with employment tax laws. Under the program, the IRS will conduct audits of 6,000 employers selected at random. As part of the audits, employers can expect a close examination of whether its workers are properly classified: According to a recent estimate, misclassifications account for 82% of uncollected taxes.
    
2. Dedicated enforcement personnel. In the last two years, the Wage and Hour Division of the Department of Labor has hired more than 350 investigators to uncover misclassification and other employment violations. The Department's budget includes $25 million for 2011 — and an unprecedented $46 million for 2012 — to crack down on worker-misclassification violations.
    
3. Harsh penalties for misclassification. Currently, employers who misclassify workers are subject to an array of civil and criminal penalties under both federal and state laws. Federal and state legislators, eager to address perceived abuses and generate additional tax revenue, are introducing legislation that would further penalize worker misclassification.For example, a new Senate bill, the Payroll Fraud Prevention Act, would impose new reporting violations on employers, increase misclassification penalties and provide new anti-retaliation protections to workers who attempt to be reclassified as employees.

Posted by Claudia Westin on May 11, 2011 Claudia Westin is Director of Content at WeComply, where she writes and edits a variety of interactive compliance training materials and courses. Before joining WeComply, Claudia practiced law for 15 years in the public and private sectors. She has experience as a litigator, as in-house counsel covering court administration matters for the State of California, and as an instructor and author of undergraduate business law and environmental law/policy courses. Claudia holds a J.D. from the University of Virginia School of Law.