Correctly classifying employees and independent contractors is about to become even more important.
On April 22, the Employee Misclassification Prevention Act (EMPA) was introduced in the United States Congress as an amendment to the Fair Labor Standards Act (FLSA). If it becomes law, the EMPA will impose federal criminal penalties upon employers who categorize workers as independent contractors when they should be treated as employees.
The bill (1) subjects employers to potential penalties of up to $5,000 per employee; (2) imposes additional record-keeping and notice requirements on employers; and (3) makes misclassification of employees a federal labor law violation.
An earlier version of the EMPA was presented in 2008 but never made it to debate in Congress. This time, the bill is expected to receive greater attention and support, given that President Obama was a co-sponsor of the earlier version, and Obama’s administration has significantly increased funding for investigation and enforcement of worker misclassification. For example, in November 2009, the IRS announced the Employment Tax National Research Project designed to audit 6,000 businesses, including a focus on worker misclassification.
The EMPA does not prohibit the use of independent contractors when those workers are properly classified as such. It is focused on stopping those situations in which workers who should be treated as employees are instead classified as independent contractors.
The government’s interest in stopping misclassification rests on the fact that employers do not withhold payroll taxes, pay unemployment or workers compensation premiums, or make Social Security and Medicare contributions, which diverts funds that would otherwise be collected by the employer and forwarded to governmental authorities.
For a more in-depth discussion of the factors that must be considered when classifying your workers, see Garlo Ward’s video link to Managing Employees During Economic Recovery, Parts 1 and 2, available at the firm’s website.