Independent Contractor Compliance Blog

Some U.S. Senators Are Now Calling Worker Misclassifications “Payroll Fraud.”

Each year, for the past several years, both houses of Congress have introduced bills to really toughen up on worker misclassification. Each year the bills have quietly died in committee because of higher priority issues, such as: elections, stimulus, health care reform, wars, deficits, etc. Here comes a new legislative season and another run on worker misclassification-another opportunity for law makers to “Level the Playing Field.”

Senate Bill 770

On April 8, 2011, Senators Sherrod Brown (D-Ohio), Tom Harkin (D-Iowa), and Richard Blumenthal (D-Conn.) introduced Senate Bill 770, titled the Payroll Fraud Prevention Act. This bill is basically a remake of last year’s Employee Misclassification Prevention Act and copies several years’ of similar proposed legislation that keeps being introduced year-after-year. However, this new bill is more aggressive than its predecessors because it characterizes worker misclassification as “Payroll Fraud.”

Senator Brown says, businesses that misclassify workers are cheating workers…and other businesses that play by the rules.

One of the co-sponsors, Senator Brown (D-Ohio) issued a press release characterizing companies that misclassify workers as “cheating workers…and other businesses that play by the rules.” He also referenced the “tax gap” stating the bill will “relieve the burden on American taxpayers who foot the bill when businesses [misclassify their workers].”

The bill addresses unemployment insurance tax, federal minimum wage, overtime, child labor laws and sets up a mechanism for IRS audits.

S 770, if passed into law, would expand the federal Fair Labor Standards Act (FLSA), giving the Department of Labor (DOL) much stronger tools in discovering and punishing employers who misclassify their workers as ICs. The bill would also require DOL to report non-compliant businesses to the IRS.

(Typically when the IRS audits a company for worker misclassification they also look at the company’s income and expense items).

A repeating requirement, seen in almost every version of this bill for the past several years is the required notice to all workers-employee or IC-with harsh fines.

The proposed law would require every business to provide a written notice to all workers (including currently employed workers). This notice would notify them if they have been classified as an employee or “non-employee.” The notice would advise “non-employees” they do not have the same rights to benefits as employees. The notice would provide a phone number and website to contact DOL to make further inquires or to file complaints (i.e. instructions on how to ask DOL to set up an audit of the business!)

This bill creates a legal presumption that a “non-employee” is an “employee” if the business fails to provide the worker with the notice at the time the “non-employee” begins providing services. This presumption significantly raises the bar on proving you did it right.

It also makes it a criminal offense for discharging anyone (employee or non-employee) who:

  • Makes an inquiry to DOL,
  • Initiates a “proceeding” outlined in the notice,

The fines for the above, or for any employer who fails to provide the prescribed notice, is between $1,100 and $5,000 per worker. This fine would be in addition to all other civil suits, fines, taxes, penalties and interest that may arise from the misclassification.

Some other provisions of this bill are:

  • Directs DOL to conduct “targeted audits” of certain industries “with frequent incidence of misclassifying employees as non-employees.”
  • Creates a new definition of workers called “non-employees,” and defines this classification as a “Covered Individual,” even if, “the non-employees” are properly classified as independent contractors.
  • Identifies individuals with their own corporation as “non-employees” who are covered by this bill. “Including those who provide services through a corporation or LLC, if they are required to create or maintain such entities as a condition for the provision of such labor or services.”
  • Adds a new provision creating a “special prohibited act” under federal law if you “wrongfully classify an employee as a non-employee.”
  • Provides for triple damages for willful violation of the minimum wage or overtime laws where the employer has misclassified the employee.

Click here (S. 770), if you would like to read the Payroll Fraud Prevention Act for yourself.

If the bill passes you may expect President Obama to sign it into law.  When he was a U.S. Senator he introduced a similar bill along with fellow Senators Kennedy and Durbin.  That bill was entitled, “Senate Bill 2044, the Independent Contractor Proper Classification Act of 2007.’

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