Temporary Worker Misclassification Crackdown Spreads Across the U.S: Feds Announce Misclassification Alliance

Government agencies have aggressively cracked down on worker misclassification in recent months; but took it an extra step further last week when they announced that the U.S. Department of Labor has entered into an agreement with the IRS and other agencies to crack down on employers that misclassify workers as independent contractors when they should be classified as employees.

The signatory states are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington with other states expected to follow suit. Numerous other states, including Pennsylvania and Wisconsin, have already passed worker misclassification laws that impose severe penalties on employers who misclassify their employees in an attempt to recover billions in lost revenue.

If a worker is an employee, the employer must pay the necessary federal and state unemployment taxes AND its share of Social Security and Medicare taxes, in addition to the withholdings of the employee's share of Social Security, Medicare and Income Taxes. The employer must also incur costs related to pensions, health insurance, vacation pay, sick pay, and workers' compensation insurance. In addition to all this, employers face federal and state regulations regarding working conditions and overtime.

With all of these burdensome obligations to handle, no wonder employers try to take a shortcut by classifying temps as independent contractors. However, with the likelihood of getting caught on the rise, the financial implications of incorrectly classifying workers could be financially crippling. If your company is found to be in breach of the rules, penalties include back taxes, PLUS interest AND a fine of up to 35% of the total owed. 

If you utilize or supply temporary workers on a 1099 basis, it’s worth talking to a company like Emergent (855 250 5000) who are able to handle employer obligations including payrolling, tax withholding, workers’ comp and risk management on your behalf.     

Unfortunately, the economic downturn has increased pressure on staffing firms and their clients to classifying temporary or contract workers as independent contractors to lower their costs and/or provide a better rate to their clients. Staffing firms tempted to do so are well-advised to first make sure they are complying with federal and state law as well as the IRS 20 Factor test. The majority of workers assigned through a staffing arrangement perform their work under the supervision and control of either the staffing firm or the client, and the assignment usually takes place at the client’s offices –a good indicator that the worker should be classified as an employee rather than a contractor.

Worker misclassification also can lead to other serious issues such as work authorization, overtime pay, benefits eligibility, workers' compensation insurance, state unemployment insurance taxes, and violation of state worker misclassification laws. The entire process can be costly and extremely onerous for businesses. To be safe rather than sorry, contact Emergent today on 855 250 5000 or info@emergent.com.

For additional information on proper classification of workers, see the new 12th edition of the ASA book Employment Law for Staffing Professionals.

The Rise and Risks of the Contingent Workforce

Last week, Emergent was invited to host a webinar for HR.com and the Institute of Human Resources on "The Rise and Risks of the Contingent Workforce".

If you'd like to hear the webinar or receive a copy of the presentation, please click here where you will be taken to HR.com and prompted to create an account (it's quick, easy and takes just a minute) so that you can view our webinar on the HR.com site. Alternatively, you can e-mail info@emergent.com and one of our team members will send you a copy.


During the webinar, we asked the attendees to take part in a short poll and we found that co-employment, along with 1099 misclassification, were the top two concerns for companies hiring temporary workers. 

Co-employment is worrying for many companies that use contingent workers as the rules can be complex, change often, and can be challenging to sort out. Co-employment occurs when the company that utilizes the contingent worker’s services (the client company) manages the workers on a day-to-day basis, becoming a co-employer or joint employer along with the staffing supplier.

Co-employment could mean that the client company may be held liable for the decisions and mistakes of the staffing supplier and vice versa. Client companies and staffing suppliers must be clear about who is the employer of the worker and what responsibilities each company has towards the worker. These can vary from state to state, so companies must make sure that they are familiar with local as well as federal laws. Remember, it is both the staffing supplier AND the client company's responsibility to familiarize themselves with the law. Don't simply rely on the other party to tell you what you need to do - they might get it wrong...

Of course, it is relatively easy for a seasoned hiring manager or staffing supplier to become familiar with the laws around employing contingent workers, and they must also make sure that line managers throughout the organization of the client company know the rules and best practice surrounding the treatment of contingent workers, should they have any under their supervision. This can often prove challenging. 

We suggest that companies and staffing suppliers - after thoroughly researching best practice and obtaining legal advice - create a guide book that managers can refer to on how to properly engage contingent workers. Interestingly, when polled during our webinar, 64% of HR professionals said their companies did not issue any such guidance for hiring managers. 


Another concern for our webinar attendees was the misclassification of temporary staff as independent contractors. 46% of contingent workers classified as 1099 independent contractors are found by the IRS to be misclassified and one in three companies fail their worker classification audits.


Again, the rules are complex, so we suggest taking the 20 point IRS test to carry out an assessment of your contractors. If you don't meet the required criteria, your contractors may be more appropriately classified as W2 employees. If so, you should give us a call....


Emergent employs the contingent workers your company recruits or supplies. We are part of a family of companies that is one of the largest employers of contingent labor in the U.S. - trusted by many Fortune 500 companies to employ their contingent workforce.

Talk to us today to find out how we can help you manager your contingent workforce, maximize your profit and minimize your risk. Call us on 855 250 5000.

Does Your Company Use or Supply Contingent Workers? If So, Here Are Some Considerations.

Utilizing contingent workers can seem easy and seamless for your organization. Contingent workers provide some flexibility that a direct hire workforce does not. Steps to successfully utilizing a contingent worker include locating a worker, negotiating their rate, engaging them for a pre-determined length of time, and then terminating the worker's assignment when appropriate. As simple as it seems, there are many considerations when engaging or supplying contingent workers. To minimize the risk surrounding contingent workers your company may consider the following:

• If engaging the worker as a 1099 independent contractor, does the assignment meet the IRS test for Independent Contractors? See the IRS Worker Status Determination form here and a detailed IRS training manual on the subject can be found here. 
• Whether a worker is engaged on W-2 or 1099, does your company know the standards of relevant Federal and State agencies beyond the IRS? For example, see EEOC contingent worker guidelines here. Other considerations include ERISA and HIPPA. 
• Are contingent workers mentioned in your Employee Handbook? Handbooks may include language excluding contingent workers from standard benefits reserved for direct hire employees.
• Are your managers aware that contingent workers are covered under most of the same laws that apply to employees (including harassment, discrimination, and wage and hour laws)? For example, the State of Virginia provides many of it's managers with a guide to contingent workforce risk and can be viewed here.
• If your company uses contingent labor are those workers covered under your general liability insurance policy? Don’t take it for granted that they are… Additionally, ensuring that the staffing suppliers you work with carry the proper workers' compensation, general liability, and employment practices insurance can help to limit the risk of utilizing contingent workers. 

Emergent employs contingent workers you recruit, enabling your business to focus on it's core competencies. Emergent handles all employer responsibilities employment including legal, payroll, invoicing, insurance, tax, HR and workers’ comp administration for the duration of the worker's assignment. 

Misclassification vs. “Payroll Fraud”

As Federal and State agencies seek to narrow the tax gap, a new bill was recently introduced that puts independent contractor misclassification back in the forefront of the national labor and tax agenda.

Undeterred that two misclassification bills introduced in 2010 never made it out of Committee, the sponsors of the new bill are trying to drum up support  by characterizing misclassification as a form of  “payroll fraud.” – a term that invokes white collar criminality rather than an innocent oversight that is denoted by the word “misclassification”. It would appear that ignorance is no longer a defense in the eyes of the law…. 


A press release for the bill can be found here. The press release states "according to a study released in February 2009 by the Ohio Attorney General’s office, Ohio loses at least $160 million a year to each year from worker misclassification."

Should the bill pass here is what it would mean for businesses...

• Penalties for misclassification, up to $5,000 per employee, which could be staggering for the companies that are knowingly or unknowingly 'misclassifying' a significant amount of workers as 1099.
• It would be the one of the first federal laws where businesses must give newly hired workers a federally prescribed notice.
• The law would cover independent contractors who provide services through a corporation or an LLC and not just on an individual basis. 
• The bill would still allow companies to continue to pay workers on a 1099 basis – provided it is an appropriate relationship. 

-         Explaining the purposes of the new bill one of the sponsors states that the bill would “relieve the burden on American taxpayers who foot the bill when businesses” mis-classify workers. 

Read our post on 1099 misclassification for more information.

1099s and Independent Contractors: What You Need to Know

Contingent worker classification, for tax purposes, continues to be an important topic.The article provides some resources to help understand the factors that make a contingent worker an employee or a 1099 independent contractor.

20 Factor Independent Contractor Test


In order to understand if the contingent workers your company utilizes are classified correctly you may first consult the IRS 20 point test. This test will help to see if the independent contractors you work with meet the criteria needed for classification as independent contractors. In essence though, the more control your company exercises over how, when, where, and by whom work is performed, the more likely the workers are actually employees, not independent contractors.

A downloadable version of the 20 Factor Test can be found here.

46% of Independent Contractors Are Found to be Misclassified

Ultimately, 46% of Independent Contractors reviewed by the IRS are determined to be misclassified and one in three companies fail a worker classification audit. The IRS claims to lose nearly $350 billion a year in unpaid taxes, with $39 billion attributed to underpayments or non-payments by independent workers. Also, if your contractors are re-classified as employees, you have to provide them with the same benefits that you have available to your other employees.

Penalties for Corporations Can Be Severe

Needless to say, the IRS is keen to clamp down on this loss of revenue – last year they hired 4,500 new agents to undertake audits. If your company is found to be in breach of the rules, penalties include back taxes, PLUS interest AND a fine of up to 35% of the total. These penalties can easily stretch into millions of dollars. Defending these cases can take years and also absorb thousands of dollars and a lot of man hours to make the case.

It’s not just smaller companies that have made mistakes, the rules are complex, making big companies equally as fallible as smaller businesses. For example, FedEx was found to owe approximately $319 million in back taxes over worker misclassification issues and Microsoft were famously held responsible for the non-payment of employment taxes by workers inappropriately classified as contractors.

Legal Action

Class action lawsuits by groups of independent contractors requesting employee status are becoming increasingly common. A contractor may successfully sue you for unemployment insurance, disability payments, workers compensation, employee benefits, stock options, profit sharing and retirement benefits by claiming they were effectually employees. Microsoft had to settle for $97 million a few years ago because of benefits denied to contractors who were later classified as employees.

$25 Million Allocated by the Department of Labor to Target Misclassification

The Department of Labor has a $25 million budget for 2011 targeting independent contractor misclassification. The following text (in italics) from the DOL budget outlines the use of these funds and can been seen at there site here.

Employee Misclassification: Individuals wrongly classified as independent contractors are denied access to critical benefits and protections to which they may be entitled as regular employees. Worker misclassification also generates substantial losses to the Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds. To address this problem, the FY 2011 Budget includes a joint Labor-Treasury initiative to strengthen and coordinate Federal and State efforts to enforce statutory prohibitions, identify, and deter misclassification of employees as independent contractors. The Department of Labor's budget includes $25 million to support this initiative, comprised of:

• Wage and Hour Division. An additional $12 million and 90 FTE are requested to focus on misclassification during targeted WHD investigations.
• Employment and Training Administration. $11.25 million and 2 FTE are requested for competitive grants to States to increase their capacity to focus on misclassification and reward the States that are most successful at detecting and prosecuting employers that fail to pay their fair share of taxes due to misclassification.
• Solicitor of Labor. $1.6 million and 10 FTE are requested to pursue misclassification litigation, including multi-State litigation to coordinate enforcement with States and leverage their groundbreaking work.
• Occupational Safety and Health Administration. $150 thousand is requested to modify training curriculum and investigation guidelines to allow inspectors to identify potential employee misclassification and share information with WHD.

In addition, the budget proposes legislation to ensure the proper classification of employees by: (1) shifting the burden of proof to employers to demonstrate that their employees are classified correctly, (2) closing the loophole created by Section 530 of the Revenue Act of 1978, and (3) making misclassification a violation of the Fair Labor Standards Act, with appropriate penalties.


Additional Resources and Readings

Navigating Independent Contractor Compliance
Proposed Changes: 1099 Independent Contractor Classification and Misclassification Penalties

Independent Contractors Or 1099 Employees - The Risks