Independent Contractors or Employees?
Shop OurSolutions  ►
Priority Number

Independent Contractors or Employees?

Congress and the Department of Labor are cracking down on employees misclassified as independent contractors.

A bill recently introduced in Congress takes aim at employers who mistakenly classify employees as independent contractors. The bill would impose new reporting requirements on employers, increase penalties for classification violations, and establish new protections for workers who believe they have been misclassified.

What the new bill would change
Federal agencies also involved in the changes
The goal of employee classification changes
The cost of misclassification of employees

What the new bill would change

Among other things, the proposed bill would:

  • Require employers to keep employee records that reflect the accurate status of each worker as an employee or non-employee and clarify that employers violate the Fair Labor Standards Act (FLSA) when they misclassify workers.
  • Require employers to notify workers of their classification as an employee or non-employee.
  • Increase penalties imposed on employers who misclassify their employees as independent contractors and are found to have violated employees' overtime or minimum wage rights.
  • Create a website to inform workers about their federal and state wage and hour rights.
  • Provide protections to workers who are fired or otherwise discriminated against as a result of their efforts to be reclassified as employees.
  • Direct the DOL’s Wage and Hour Division (WHD) to conduct targeted audits of employee recordkeeping and classification in certain industries with frequent incidences of misclassifying workers.

Federal agencies also involved in the changes

In addition to legislative efforts to curb worker misclassification, various federal agencies are involved in an initiative to target this practice. For example, as part of the Department of Labor’s (DOL) budget plan and regulatory agenda, the department intends to add 107 full-time equivalent employees to support the Administration’s multi-agency initiative to detect and deter the inappropriate misclassification of employees as independent contractors and to strengthen and coordinate federal and state efforts to enforce labor violations arising from misclassification.

In addition, the WHD intends to develop a proposed rule that would update the employee recordkeeping regulations issued under the FLSA to “promote greater levels of compliance by employers, to enhance awareness among workers of their status as employees or independent contractors and employee rights and entitlements to minimum wage and overtime pay, and to facilitate DOL enforcement.”

The goal of employee classification changes

In a press release, U.S. Secretary of Labor Hilda L. Solis stated: “One of my goals as secretary of labor is to secure minimum and overtime wages and to help middle class families remain in the middle class. Working on the issue of misclassification is key to attaining those goals because misclassification of employees as independent contractors deprives employees of critical workplace protections and employment benefits to which they are legally entitled. I look forward to working with the Congress to address the important issue of misclassification of workers.”

The cost of misclassification of employees

An individual is not properly classified as an independent contractor merely because the parties agree to such a classification. Instead, the difference between an independent contractor and an employee is determined by a number of factors, including the nature of the relationship, the degree of control retained by the employer and the permanency of the relationship, among others. Employers generally do not have to withhold or pay any taxes on payments to independent contractors, making them an attractive option to employers. Misclassification, however, has far-reaching and costly consequences, ranging from penalties to class action lawsuits for unpaid benefits and overtime.

The DOL’s heightened enforcement efforts demand that employers take FLSA compliance seriously. Employers should make sure that their employee classifications are reviewed and updated regularly.