Independent Contractor Compliance Blog

COLUMBUS, Ohio-In a public announcement (released February 18, 2009) Ohio’s Attorney General, Richard Cordray, announced a collaboration of state agencies to combat the misclassification of workers. His statement said, “Employee misclassification is part of an ‘underground economy’ in which an employer improperly classifies individuals as independent contractors or pays them off the books’ to avoid taxes and other required payments. As a result, the state and local governments lose hundreds of millions of dollars annually.”

An invisible crime

“This is a problem that affects everyone, but most people don’t know about it,” said Attorney General Cordray. “By cutting corners, some employers are in effect stealing from the rest of us…”

It’s about the money

A report compiled by the Ohio Attorney General’s Office estimates that the extent of annual costs from worker misclassification to be:

• $100 million for unemployment compensation
• Over $510 million in Workers’ Compensation premiums
• Approximately $180 million in lost state income tax revenues
• Over $100 million in local income tax revenues lost for Ohio’s cities and villages
• Over $7.8 million to the school districts

Ohio enforcement agencies will be cooperating more closely than before

The Ohio Department of Job and Family Services, Ohio Department of Taxation, and Ohio Bureau of Workers’ Compensation have joined forces in an agreement to release and exchange confidential information about business that misclassify workers. This means when one agency catches a business misclassifying workers the others will jump on the band wagon too.

Ohio is only the latest of enforcement agencies around the country who are partnering up to multiply their resources.

In past articles I’ve reported about the Internal Revenue Service and dozens of state workforce agencies have entered into agreements to share the results of employment tax examinations and crack down nationwide to more effectively seek out and penalize businesses that misclassify workers. California was one of the very first states to partner with the IRS to multiply their resources.

One compliance violation leads to others.

However, California enforcement agencies have been partnering within the state for years. Besides partnering with the IRS, the FTB, BOE, EDD, AG, DIR, and local law enforcement agencies all have information exchange and cooperation agreements with each other. This creates a “domino effect”. When one agency discovers a company is out of compliance they usually share their findings with other enforcement agencies. This makes it possible for a workman’s compensation claim today, to evolve into a full blown tax audit next year.

The price of being wrong is going up

Usually the fact a company is being fined for misclassification issues becomes public as other enforcement agencies come to feed on the business’ remains. Soon the misclassified workers learn of the government rulings and often file civil, co-employment suites for fringe benefits, stock options and other employee benefits not available to independent contractors.

These “domino actions” significantly increase the costs of misclassifying workers far beyond the original cost had the company properly classified the workers in the beginning.

That is the purpose of these partnerships.

The government wants to generate more income, but also raise the cost of gambling with IC compliance until it is not worth the gamble if you lose.