Misclassification Of Employees As Independent Contractors

The misclassification of employees as independent contractors does not in and of itself violate the Fair Labor Standards Act (“FLSA”); however, the consequences of misclassification can include overtime violations and significant tax liability.  The Department of Labor (“DOL”) recently announced that the Labor and Treasury Departments are pursuing a joint proposal to eliminate incentives for employers to misclassify employees as independent contractors.  The proposed  2011 Budget for the DOL includes an additional $25 million to target misclassification with 100 additional enforcement personnel and competitive grants to boost States’ incentives and capacity to address the issue.  The Treasury Department estimates these efforts will increase Treasury receipts by more than $7 billion over 10 years.

As part of the joint Labor/Treasury proposal, the IRS has initiated a program to target 6,000 U.S. companies at random over the next three years for comprehensive tax examinations.  Approximately 200-300 specially trained IRS examiners will conduct the audits.  The IRS has indicated that one of the issues the examinations will target is the misclassification of employees as independent contractors.

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