Labor FY 2011 Budget Request Would "Prevent Misclassification" of Employees as Independent Contractors
The fiscal year 2011 budget request for the Department of Labor (DOL) includes a joint Department of Labor - Treasury $25 million initiative to "strengthen and coordinate" federal and state efforts to prevent the misclassification of employees as independent contractors.
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The DOL's portion of the budget request includes an additional $12 million and 90 full-time employees for its Wage and Hour Division to address employee misclassification (the remaining $13 million would be funded by the Treasury Department).
DOL's portion of the requested initiative would:
Focus on worker misclassification during DOL Wage and Hour Division investigations;
Issue competitive grants to states to increase their capacity to focus on misclassification;
Pursue misclassification litigation; and
Modify training curriculum and investigation guidelines to allow inspectors to identify potential misclassifications and share that information with the Wage and Hour Division.
DOL Says Worker Misclassification Results in Lost Benefits and Gov't Revenue
According to DOL, individuals wrongly classified as independent contractors are denied access to critical benefits and protections--such as family and medical leave, overtime, civil rights laws, and unemployment insurance--to which they may be entitled as regular employees.
Worker misclassification also results in substantial losses to the Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds. In its last comprehensive estimate of the scope of the misclassification problem for tax year 1984, the Internal Revenue Service estimated that 15% of all employers misclassified a total of 3.4 million employees as independent contractors, resulting in an estimated annual revenue loss of $1.6 billion (in 1984 dollars).
(The issue of employee drivers versus independent contractor drivers is controversial in the trucking industry. In 2009, the Port of Los Angeles was enjoined from requiring drayage concessionaires to exclusively use truck drivers that are employees. See ITT's Online Archives or 06/18/09 news, 09061825, for BP summary of this preliminary injunction and related issues.)
Budget Proposal Also Includes Suggested Legislative Priorities
The FY 2011 DOL budget also supports legislation to ensure the proper classification of employees by (i) shifting the burden of proof to employers to demonstrate that their workers are properly classified; (ii) eliminating a loophole created by Section 503 of the Revenue Act of 1978 that allows employers to misclassify employees as independent contractors1; and (iii) making worker misclassification a violation of the Federal Labor Standards Act, with appropriate penalties.
DOL priorities mirror pending bills. DOL's legislative priorities mirror bills that have already been introduced in both the House and Senate that would limit the IRS safe harbor provision for determining if a worker is an employee or an independent contractor. The bills are supported by advocates of clean trucking initiatives who view modification of the safe harbor criteria as a possible new tact in their efforts to improve air quality in and around U.S. ports.
The bills (H.R. 3408, introduced by Representative McDermott on July 30, 2009, and S. 2882, introduced by Senator Kerry on December 15, 2009) would modify the existing IRS Sec. 503 "safe harbor" provision for the classification of workers as independent contractors by eliminating long-standing, recognized industry practice as a reasonable basis for classifying a worker as an independent contractor.
1Under Section 530, a reasonable basis for treating a worker as an independent contractor exists if the taxpayer reasonably relied on (1) past IRS audit practice with respect to the taxpayer, (2) published rulings or judicial precedent, (3) long-standing recognized practice in the industry of which the taxpayer is a member, or (4) if the taxpayer has any "other reasonable basis" for treating a worker as an independent contractor. The legislative history states that section 530 is to be "construed liberally in favor of taxpayers."
In addition, in order for Section 503 to apply, the taxpayer must not have treated the worker as an employee for any period, and for periods after 1978 all Federal tax returns, including information returns, must have been filed on a basis consistent with treating such worker as an independent contractor. Further, the taxpayer (or a predecessor) must not have treated any worker holding a substantially similar position as an employee for purposes of employment taxes for any period beginning after 1977 (the "similar worker consistency requirement").
FY 2011 DOL budget proposal available at http://www.dol.gov/dol/budget/2011/PDF/CBJ-2011-V2-03.pdf.
Summary of DOL 2011 budget proposal available at http://www.dol.gov/dol/budget/2011/PDF/bib.pdf.
IRS publication describing Sec. 503 provision available at http://www.irs.gov/pub/irs-utl/x-26-07.pdf.
Text of H.R. 3408 available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h3408ih.txt.pdf.
Text of S. 2882 available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s2882is.txt.pdf.