Independent Contractor Misclassification and Obama’s Second Term

Last month, America wrapped up a long and divisive Presidential election. President Obama and his administration have many critical challenges to tackle in their second term. While some issues are pressing and require immediate attention (i.e. the imminent fiscal cliff), there are many others that Obama, as he seeks to shape his long-term legacy, will have a chance to put his stamp on for years to come.

One such issue is independent contractor misclassification. As MBO Partners has been chronicling and championing for years, the number of independent contractors in the US is growing quickly. This trend will likely accelerate as the world economy enters a new phase of uncertainty and more workers choose independence as a career path over regular employment.

With the growth of the independent workforce comes increased risk for employers to be charged with worker misclassification. The costs for independent contractor misclassification can be huge. In addition to back payments for unpaid overtime wages, employment taxes, income tax withholdings, workers’ compensation and unemployment insurance premiums, contributions to Social Security and Medicare, and retirement benefits, employers can often find themselves at the wrong end of class-action lawsuits from groups of disgruntled workers.

Impact on Employers

After the election, America is still left with a Republican-controlled House and Democrat-controlled Senate in the next Congress. This means that the inability to push partisan legislation through Congress is likely to continue. It has been well documented that the Obama Administration is fiercely opposed to worker misclassification and, now more than ever, employees will be favored over independent contractors. Therefore, we will likely see an increased reliance on regulatory agencies, and their rulemaking and administrative abilities, in order to advance and enforce a pro-labor and employment agenda.

Many industry experts predict we will see an increase in enforcement activity from federal agencies such as the Department of Labor (DOL), National Labor Relations Board (NLRB), and Equal Employment Opportunity Commission (EEOC).

As evidence, in early November 2012 at the ABA Labor and Employment Law Conference, M. Patricia Smith (Solicitor of Labor for the DOL) reaffirmed that independent contractor misclassification investigations are one of the top priorities for DOL enforcement initiatives. They will continue to work with other federal agencies (such as the IRS) and state agencies to share information and collaborate on investigating worker misclassification claims. The DOL has signed memorandums of understanding with the IRS and at least 11 state labor agencies to coordinate enforcement activities and share audit information.

Stalled Federal Legislation

In the past year, worker misclassification legislation has been successfully enacted at the state level (for example: California’s SB 459, which was designed to prohibit willful misclassifications), often with burdensome reporting requirements and severe penalties.

President Obama’s re-election may bring the resurrection of two similar bills that have been stalled in Congress:

• Employee Misclassification Prevention Act (H.R. 3178). Sponsored by Lynn Woolsey (CA) it is patterned after California’s SB 459. This bill is very similar to S 770.
• Payroll Fraud Prevention Act of 2012 (S 770). This bill mirrors HR 3178, and if they move forward, these two competing bills will likely be consolidated into one. It is also worth noting that S 770 has its origins in the IC Proper Classification Act, which was proposed legislation introduced in 2007 by then-Senator Obama.

Obamacare

President Obama’s re-election likely ensures the survival of the newly enacted Affordable Care Act (“ACA” and frequently referred to as “Obamacare” during the election). The law requires all businesses that employ more than 50 full-time employees to provide their staff with access to group health insurance plans, which means companies might transition more workers into becoming independent contractors in order to avoid the threshold mandated for ACA coverage. Thus, there is a legitimate concern that ACA could have the unintended consequence of increasing independent contractor misclassifications. Conversely, from an enforcement agency perspective, there is an incentive to reclassify workers from independent contractors to employees so that they’re covered under ACA.

Conclusion

While gridlock in Washington might make the passage of any new federal labor or employment legislation challenging, it won’t preclude federal agencies from enforcing the Administration’s workplace policy. The Obama Administration, emboldened by re-election and driven by a desire to positively shape its legacy, will likely continue to advance its pro-labor and pro-employment agenda by driving more agency enforcement activity to squelch the temptation of worker misclassification. They will be supported by numerous state agencies who share the same vision and tax revenue objectives.

As a result, there is no question that companies who utilize contingent workers are entering an era of heightened risk. For employers there’s just too much at stake to be nonchalant about independent contractor misclassification or to elect the “self-insurance” route (otherwise known as “kicking the can down the road”). The smartest companies will choose to utilize independent contractor engagement specialists who not only have deep experience but also have a breadth of engagement solutions so that they’re not putting square pegs in round holes.

Companies need to be vigilant, deploy best practices, and examine their independent contractor classifications before a state or federal auditor (or, even worse, a plaintiff’s class action lawyer) does it for them.