The U. S. Department of Labor (DOL) has been beefing up its enforcement of employers’ misclassification of workers as independent contractors rather than employees. The DOL recently announced successful enforcement actions against several companies that were required to pay significant compensation for misclassifying workers.
The IRS also is more closely scrutinizing independent contractor classifications.
Misclassification is an issue because it results in employers failing to withhold workers’ payroll taxes, not filling out I-9 immigration forms, failure to pay overtime, and not paying workers’ compensation. It also affects workers’ eligibility for retirement benefit plans.
Some of the red flags for misclassification of a worker as an independent contractor are:
- Payment by the hour rather than by the project;
- The worker receiving paid sick or vacation leave;
- The employer reimbursing the worker for business expenses; or
- The worker being required to sign a noncompete agreement.
An employer’s failure to classify a worker properly can result in significant penalties, as illustrated by the DOL’s recent enforcement actions. The independent contractor classification should be used only after careful scrutiny to determine that it is being used correctly.