DOL to continue close scrutiny of independent contractors

In its FY 2016 budget request, the U.S. Department of Labor seeks an increase of almost $31.7 million and 300 additional enforcement staff for its Wage & Hour Division (WHD).

Much of this requested increase is flagged to increase directed investigations under WHD’s “fissured industries” initiative: “WHD continues to increase its presence in those industries that have evolved business practices to avoid classifying and treating workers as employees, including those in which employees are misclassified as independent contractors.”

The misclassification of employees as independent contractors, according to DOL:

“presents a serious problem for affected employees, employers, and to the entire economy. Misclassified employees are often denied access to critical benefits and protections – such as family and medical leave, overtime, minimum wage and unemployment insurance – to which they are entitled. Employee misclassification also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers compensation funds.”

To address the “serious problem” of independent contracting, WHD is spending more resources than ever on directed investigations in targeted industries viewed as frequently and inappropriately using independent contractors.   A “directed” investigation is one started by WHD even though no employee or independent contractor has made a complaint. So, even if all of your employees and IC are completely satisfied with their compensation, WHD may still show up (often unannounced) to conduct an investigation. WHD has been steadily increasing the percentage of its investigations that are self-started as opposed to investigating employee complaints. In FY 2010, only 27 percent of wage-hour investigations were directed cases. Last year, 44 percent of WHD’s investigations were directed cases. During that same time, “complaints registered” with WHD have decreased from 31,824 in FY 2010 to only 22,447 in FY 2014. No data is available to determine whether employee complaints are decreasing because fewer employees are seeking WHD’s help or whether WHD is just accepting fewer complaints.

Although not addressed in the FY 2016 budget request, in prior years WHD’s list of targeted industries for independent contractor investigations has included:

  • Construction,
  • Janitorial,
  • Home Health Care,
  • Child Care,
  • Transportation and Warehousing,
  • Poultry and Meat Processing,
  • Landscaping, and
  • Professional and Personnel Services

Finally, a visit by a WHD investigator requesting copies of all your IC agreements may indicate an investigation much broader than whether overtime is due under the FLSA. WHD currently has agreements with the IRS and 20 states to share information and coordinate enforcement efforts when businesses misclassify employees as independent contractors. Thus, a WHD investigation could lead to liability for unpaid employment taxes, workers’ compensation and unemployment insurance.

The bottom line: If your organization engages a significant number of independent contractors, especially in the targeted industries, it is time and past time to starting thinking about conducting a compliance review to assess the risk that a federal agency, state agency, federal court or state court could determine that the independent contractors should have been treated as employees.

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