Last year, legislators introduced two bills that target classification of independent contractors. The Employee Misclassification Prevention Act would penalize employers that misclassify employees as independent contractors. The Fair Playing Field Act of 2010 would end the current moratorium on Internal Revenue Service (IRS) guidance regarding worker classification and would increase tax penalties for misclassification.

Both bills were referred to committee and aren’t likely to be reintroduced this year. But that doesn’t mean the battle is over.

Homing In

The Department of Labor (DOL) has placed a high priority on reducing worker misclassification and has identified the construction industry as one of the main offenders.

Although commercial, industrial, and home building firms will obviously be first in the DOL’s sights, all contractors that use independent contractors will be subject to this enhanced focus. The DOL plans to “redouble its efforts to combat worker misclassification” by funding state grants to improve data-sharing between states and the IRS (and other federal and state agencies). (Source: DOL budget summary.)

In its 2011 budget, the DOL calls for a “joint Labor-Treasury initiative” to coordinate federal and state efforts, with 100 new hires focused on misclassification and litigation. The 2012 budget allows for a high-performance award program for those states most successful at prosecuting employers. The bonuses paid will be used to upgrade states’ programs for detection and enforcement.

The DOL’s We Can Help program encourages workers to notify the department if they think they’ve been improperly treated by an employer. To deal with the resulting increase in investigations, the DOL’s Bridge to Justice program refers claimants to private trial lawyers through the American Bar Association — which has spiked misclassification litigation.

Right to Know

And last, but not least, there’s a proposed rule called the Right to Know Under the Fair Labor Standards Act, which will require employers to perform an analysis of all their independent contractors and notify them of the reasons for classifying them as such.

So if you use independent contractors, don’t assume that a written contract will be sufficient to immunize you from the efforts of the DOL or its partners. Since neither the DOL nor the IRS has a “bright line” test, you should familiarize yourself with the similar but different factors each department uses on a case-by-case basis to determine independent contractor status and to make sure your business practices are compliant.

—Rick Provost has more than 20 years experience helping to build the country’s largest design/build franchise network. He is now a principal in SMI Safety, a safety consulting and staffing business.