The Labor Department is cracking down on employers who cheat their employees out of wages. In so doing, the Department is entering agreements whereby information will be shared between the Department, several states, and the Internal Revenue Service. The Labor Department's top attorney, Patricia Smith, has indicated that when state and federal agencies share information, businesses can then be assessed multiple fines. She explained, "There's more of an incentive to be in compliance because the cost of what we consider to be illegal activity has increased." So, for example, a company that in the past might have paid only a single fine to a state agency for improper unemployment insurance payments will now pay additional fines and penalties to the Labor Department and the IRS.
This information sharing targets specific illegal wage and hour practices that deprive employees of minimum wage and overtime pay as well as other benefits. These practices include misclassification of workers as exempt employees and improper labeling of employees as independent contractors. Such misclassifications result in the denial of employees' rights to workers' compensation benefits, unemployment insurance, overtime pay, and social security benefits. Additionally, employers engaging in independent contractor misclassification do not make proper deductions for federal taxes. So, the reporting of these violations by any state to the IRS allows the IRS to go after the company for unpaid taxes. The states cooperating with the Labor Department on these issues include Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington. The states of New York and Illinois are expected to follow suit in the near future.
Since taking office in 2009, Labor Secretary Hilda Solis, has made increased enforcement of federal wage-and-hour laws a top priority. The industries that are the focus of such "wage theft" by the Department include the hotel, restaurant, janitorial, health care and day care industries. Additionally, the Department has targeted homebuilders for failing to pay workers the minimum wage or overtime. The head of the Department's Wage and Hour Division, Nancy Leppink, recently stated, "The urgency of addressing this issue has become more pronounced because we're seeing these illegal business practices used by more and more industries, like restaurants."
The stepped up enforcement comes at a time when businesses are favoring the employment of independent contractors or freelancers in order to save money or avoid hiring staff in an uncertain economy. Figures and estimates from some government agencies indicate that 20 to 35 percent of all employers have classified people as independent contractors either mistakenly or intentionally, when they really should be classified as employees.
Notwithstanding the losses borne by misclassified employees, these illegal employment practices have broad implications for both business and government. For example, when an employer classifies an employee as a contractor, that employer maintains a competitive advantage since his or her total labor costs are lower. Richard A. Sebeck, program manager for the Maryland Department of Labor, Licensing and Regulation's Division of Labor and Industry explained, "It's bad for all honest businessmen." From a Government perspective, millions of dollars in payroll tax and other revenues are lost. For the worker, many benefits are lost, including Social Security, health care and unemployment insurance. Mr. Sebeck also added that when employees are misclassified as contractors and get hurt on the job, they are not entitled to workers' compensation.
It is very important that workers be properly classified as employees to prevent the employer from being potentially subject to thousands of dollars in fines and back wages. If a company's so called "independent contractors" are required to follow the company's specific instructions for completing tasks and are also required to clock in and out on a routine basis, it is likely that they are misclassified, and are, in the eyes of the law and the various enforcement agencies, employees.
Frank Vasquez, with Case & White law firm, states that, "The penalties for this misclassification [are] so severe that every employer is wise to consider it." If a complaint is filed by a contractor that is really an employee, the employer could be liable for any overtime wages owed, back payroll taxes, plus unemployment insurance. Mr. Vasquez suggests that if an employer wishes to utilize temporary workers, the employer should consider hiring them through arrangements with a temporary employment agency.
Just since 2009, upwards of $9 million in back wages for 15,000 workers have been collected by the Labor Department just in cases where misclassification of independent contractors was alleged.
Sources:
Labor Department Expands Enforcement of Wage Violations, Associated Press, by Sam Hananel, September 19, 2011
Working: U.S. and Local Governments Crack Down on Employers Who Pay Workers as Contractors, The Washington Post, Capital Business, by Vickie Elmer, October 9, 2011.
