The Senate Health, Education, Labor and Pensions (HELP) Committee recently held a hearing on the Employee Misclassification Prevention Act of 2010 (S. 3254/H.R. 5107) in a effort to highlight both labor law and tax revenue concerns with independent contractor misclassification.

Deputy Secretary of Labor Seth Harris, along with employers and labor law experts testified, before the HELP Committee hearing titled “Leveling the Playing Field: Protecting Workers and Businesses affected by Misclassification” hosted panelist from the Department of Labor.”

The legislation would amend the Fair Labor Standards Act (FLSA) of 1938 to require employers to keep records of non-employees (i.e., independent contractors) who perform labor or services for remuneration and to provide a special penalty for persons who misclassify employees as non-employees.

In short, the proposed legislation would do the following:

• Creates a new record-keeping requirement for employers to provide notice to employees and those classified as non-employees of their classification, that their rights to “wage, hour, and other labor protections” depend upon proper classification, and directing them to the Department of Labor for further information about the rights of employees. 
  
• Failure to keep the required records or provide the required notice would automatically establish the assumption that the worker is an employee of that employer.
  
• Imposes civil penalties of up to $1,100, or up to $5,000 for repeated or willful violations, for each misclassification or violation of the record-keeping or notice provisions. If a misclassification accompanies violations under the FLSA’s maximum hours or minimum wage requirements, a worker could recover double his or her liquidated damages.
  
• Requires state unemployment insurance agencies to conduct auditing and investigative programs to detect employers that misclassify or fail to properly report compensation to workers with the effect of excluding employees from unemployment compensation coverage.
  
• Requires the DOL to target industries it determines to have frequent incidence of misclassifying workers for audits.
  

Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. However, employers do not generally have to do this with independent contractors.

The bill’s sponsors, Sen. Sherrod Brown (D-Ohio) and Lynn Woolsey (D-Calif.), assert the legislation will provide fair labor standards (e.g., minimum wage and overtime), health and safety protections, and unemployment insurance or workers’ compensation benefits to workers that are misclassified as independent contractors instead of employees.  

Purportedly, the sponsors and other proponents of the legislation are targeting “bad actors” that intentionally manipulate these labor and tax nuances in hiring independent contractors. However, it is unclear how pervasive the allegations are with respect to small employers. Of concern is the additional layer of paperwork and requirements passed along to small employers in order to comply with these new proposed requirements.

The Department of Labor has already undertaken a campaign aimed at placing a larger burden on employers to “plan, prevent and protect” in the workplace. In fact, the Department’s Wage and Hour Division is expected to promulgate regulations this year for the consideration of requiring employers to notify workers of their rights under the FLSA, and to provide information regarding hours worked and wage computations.

While legislation similar to the Employee Misclassification Act of 2010 was introduced in previous congressional sessions, neither chamber’s version made it out of their respective committees of jurisdiction.

Nonetheless, it is prudent for small employers to ensure that their workers are in fact independent contractors. NSBA will continue to monitor the issue and its developments to ensure unnecessary burdens are not placed on small businesses.

Click here to learn more about how to differentiate between an employee and independent contractor.