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Governments finally crack down on misclassified "independent contractors"

The media reported on February 18 of this year that various governmental agencies have finally begun to investigate and the mis-use of rules governing who is an "employee" and who is an "independent contractor."  The articles discussing the subject point out that the problem is all pervasive and expense to taxpayers, legitimate business and the middle class. Recent studies by major universities have concluded that between 5 and 10 percent of all private sector workers are "mis-classified" as independent contractors---meaning they aren't eligible for unemployment benefits or workers compensation, that their employers don't have to cover legitimate payroll taxes, and none of the normal wage and hour rules about overtime, vacation pay, or other rules governing civil rights apply to these typically blue-collar jobs.  Most state governments agree that FedEx Ground is perhaps the country's major offender.

The Federal Government loses Social Security, Medicare and unemployment insurance taxes that offending employers should pay, and a federal study concluded that employers illegally avoided taxes on 3.4 million regular workers.  The Labor Department estimates that nearly 30 percent of companies misclassify at least some employees.  The Ohio Attorney General estimates that Ohio has nearly 100,000 misclassified "independent contractors" who cost the state $35 million dollars  per year in unemployment insurance taxes, alone, $103 million dollars in work comp premiums, and more than $220 million dollars in income tax revenue.

The savings for illegal employers can mean a 20-30 percent "penalty" for law-abiding employers who must compete with these renegades.  While the U.S. Chamber of Commerce disagrees with this governmental "crackdown" (and every other consumer-oriented or regulatory measure the government proposes) it is clear that legitimate businesses would prefer that all companies play by the rules. 

The most commonly misclassified workers are truck drivers, construction workers, home health aides and high-tech engineers.  If laid-off or injured, they typically have no safety net.  They are a major concern of the Middle Class Task Force created by the Obama Administration, which is seeking to hire 100 new employees to enforce the existing rules.  The Task Force argues that in addition to protecting middle class workers and jobs, the new "enforcers" would actually recognize a savings of 7 billion dollars over ten years. 

California's Attorney General recently won a $13 million dollar judgment against two companies who had misclassified 300 janitors and is seeking 4.3 million dollars from a construction firm that routinely misclassifies employees.  The Illinios Department of Labor just imposed $328,000 in fines on a home improvement company that forced home improvement workers to incorporate as separate businesses in an attempt to re-classify them as "independent contractors."  The I.R.S. has just initiated an audit of more than 6,000 employers to determine compliance; a similar effort by New York's  labor commissioner conducted 2413 misclassificaiton investigations and 65 joint sweeps, identifying 31,000 instances of misclassification and assessing $25 million dollars in unpaid unemployment taxes and wages.

We recently an unusually glaring example of this trend among cheating employers, as a company installing "green" heating systems hired laborers under a pretense that they were independent contractors:  even the company's own workers compensation carrier scoffed at the company's effort to disguise the nature of the employment relationship.

Thompson O’Neil, P.C.
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Traverse City, Michigan 49684
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