Worker Misclassification Initiative Brings Greater Enforcement

Worker Misclassification Initiative Brings Greater Enforcement
May 07 14:14 2017 Print This Article

In 2011, the Department of Labor signed a memorandum of understanding with the Department of Revenue establishing what has come to be known the ‘Worker Misclassification Initiative’. The goal of the Initiative is to crack down on employee misclassification among employers. It makes no distinction between purposeful misclassification and genuine mistakes.

Since the memorandum of understanding was agreed on, the two departments have been working with the states to establish similar agreements with them. All but 13 states are now on board, strengthening Washington’s resolve to crack down on employee misclassification. Under the arrangements, the two federal departments and the states collaborate by sharing information and enhancing one another’s enforcement efforts.

What does this mean for employers? It means misclassifying employees, whether intentionally or indirectly, could result in punitive action at both the federal and state levels. It is now more important than ever that employers make sure all their employees are properly classified and that all necessary taxes are withheld and paid.

Recommendations for Avoiding Misclassification

One unfortunate aspect of the Worker Misclassification Initiative is that it tends to be too vague about what is legally required of employers. Be that as it may, there are certain things employers can do to significantly reduce the risks of being in violation. Among them are a number of recommendations set forth by the government:

  • Employ the 20-Factor Test – The IRS has developed what they call the ’20-factor test’ for determining whether a worker is truly an independent contractor or not. Just the fact that there are 20 things to consider shows just how vague government regulations are, but that is neither here nor there from an enforcement perspective. Going through the 20-factor test can be very helpful.

  • Regular Employee Reviews – Employers should be regularly reviewing the status of all employees to account for changes that may occur from time to time. Regular reviews can include the 20-factor test.

  • Immediate Correction – In the event that a misclassification is discovered, immediate correction is in order. Labor and Treasury both agree that immediate correction reduces the risk of further problems.

  • Maintain Documentation – It is always a good idea to document all efforts to maintain compliance with employee classification. Documentation shows a good-faith effort that could relieve an employer of certain penalties in the event of a violation.

One last thing for employers to remember is that assuming complaints or investigations will never be launched is a foolish way to do business. Companies and their executive management need to be proactive in anticipation of future complaints or investigations. A company cannot successfully defend itself if it is not prepared to do so.

Working with Payroll Vendors

The Worker Misclassification Initiative and the rules it is meant to strengthen are not applied differently among companies that handle payroll in-house and those that outsource. As in most other areas of compliance, employers are ultimately responsible for all classification issues. Third-party payroll providers can only do as instructed by their clients.

Having said that, there is a lot to be said for outsourcing payroll to a company with a proven track record of dealing with employee classification issues. Well-known payroll providers like BenefitMall make it their business to know the law and how to apply it. Their experience and knowledge can mean the difference between properly classifying all workers and missing the boat on some.

Make no mistake; the federal government is working with the states to more strictly enforce labor laws having to do with employee misclassification. Do not allow your company to suffer the consequences of noncompliance.

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