On September 19, 2011 the United States Department of Labor (DOL) and Internal Revenue Service (IRS) signed a memorandum of understanding to increase the agencies’ coordination in their efforts to curtail employee misclassification. Seven states–Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington–have already signed cooperation agreements with the DOL and IRS to combat employee misclassification. Four more states–Hawaii, Illinois, Montana, and New York–are expected to sign similar agreements in the near future. Government agencies at all levels are cracking down on misclassification in response to substantial losses in tax revenues related to what they view as a pervasive practice of misclassifying employees as independent contractors.
Under the new cooperation agreements, states will share information with the DOL and IRS if an employer fails to remit unemployment insurance or workers’ compensation premiums on behalf of employees found to be inappropriately classified as independent contractors. This information will be used by the DOL to audit the employer for federal wage-hour violations and by the IRS to seek unpaid taxes and associated penalties. Employers who benefit from using independent contractors are now vulnerable to a three-pronged strike for a single misclassification violation. Employers are advised to familiarize themselves with the factors the DOL, the IRS, and state enforcement agencies use to determine whether a worker is an independent contractor or an employee to avoid steep misclassification penalties.