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Congress Considers Increased Enforcement and Penalties for Worker Misclassification

Congress is considering two bills that would increase the federal government’s enforcement of worker classification laws.  Senators John Jerry (D-Mass.) and Jim McDermott (D-Wash.) recently introduced the Fair Playing Act into the Senate.  This bill focuses on a tax loophole allowing businesses who misclassify a worker as an independent contractor to avoid paying a tax penalty if the business always treated the worker as an independent contractor and had a reasonable basis for doing so.

In addition to closing this loophole, the bill would require employers to notify independent contractors of their status, inform them of the contractor’s tax obligations, notify them that certain employment laws do not apply to them, and inform them that they have the right to challenge their classification with the IRS.  The bill would require the Secretary of Treasury to provide guidance on worker classification.  The bill’s sponsors hope to raise $6.9 billion in federal tax revenue over 10 years by closing this loophole.

At the same time, the Employee Misclassification Prevention Act increases enforcement of worker misclassification under the Fair Labor Standards Act.  The legislation would increase employer recordkeeping requirements for independent contractors by requiring employers to keep records of non-employees who perform labor or services.  It also would require employers to inform all workers of their status as an employee or an independent contractor and their right to challenge this classification.  The amount of possible liquidated damages would double, and civil penalties would be increased to $1,100 per employee for a single violation, and up to $5,000 for a willfully repeated violation.  This bill also would authorize the Internal Revenue Service (IRS) and the Department of Labor (DOL) to share information regarding misclassification violations.  This sharing of information would ensure that an employer would get penalized by both the IRS and the DOL when they are found to misclassify workers.

Employers should ensure they are properly classifying their workers.  To do this, consider engaging counsel to help you audit your own Wage and Hour practices.  This is particularly important as several states, along with the Federal government, increased their enforcement of worker misclassification laws.  If the new legislation passes, employers will be under even greater risk for fines and penalties. 

Brody and Associates regularly advises management on complying and remaining up to date with state and federal employment laws.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0565.