Legislation targets Worker Misclassification

10th June 2008

Recently Released Article Concerning Legislation on Independent Contractors

Posted on 06/10/2008 by Staffing Industry Analysts (www.staffingindustry.com)

Several bills in the works
Increased penalties being considered
But legislation could be boon for staffing
Craig Johnson

Event
Several proposed federal laws aim to get tough on firms that misclassify workers as independent contractors. Meanwhile, some staffing firms say interest in the issue of compliance is rising among staffing users.

Background and analysis
The latest federal bill, the Employee Misclassification Prevention Act of 2008, was introduced May 21 by Representatives Lynn Woolsey, D-CA, and Rob Andrews, D-NJ.
The bill, H.R. 6111, would impose penalties on employers who misclassify workers, require employers to notify workers of their right to challenge their classification, and require the U.S. Department of Labor to conduct audits of employers in industries that frequently misclassify employees.
“Employers who misclassify their employees as independent contractors rob workers of needed pay and benefits and cost government at all levels substantial uncollected revenue,” Woolsey said in a statement.
The lawmakers cited a Coopers & Lybrand study that estimated the federal government lost $34.7 billion in taxes between 1996 and 2004 because of misclassification of workers.
The lawmakers cited a Government Accountability Office study that found more than 10 million U.S. workers are classified as independent contractors, and a Massachusetts study that found 11.4% of that state’s construction workers had been misclassified as independent contractors between 2001 and 2003.
While legislators are interested in independent contractors, there’s also interest in the business community.
Gene Zaino, president and CEO of MBO Partners, a Herndon VA-based firm that works with independent contractors, said there’s a tremendous amount of interest at this time in issues surrounding the use of independent contractors.

“I think people are becoming more aware of it, and the independent contractor segment of the workforce has been growing dramatically,” Zaino said. People are realizing that they need to use best practices and minimize risk, he said. Jason Posel, senior VP of ClearPath, also said interest is rising.
“I see that companies are becoming more and more aware of 1099 compliance issues,” Posel said. “I think the larger companies have probably been aware of this anyway since the Microsoft case,” he said, but now even smaller companies are gaining interest.

Microsoft was sued in the late 1990s by freelancers claiming they were really employees of Microsoft and entitled to benefits, including employee stock purchase rights. Microsoft ultimately settled for almost $100 million. FedEx Ground, a division of FedEx Corp., is presently now facing legal action over the classification of its drivers as independent contractors.

Companies can face a challenge when a worker with skills critical to a project will only work on a 1099 basis, Posel said. And there can be differences of opinion between a human resources department that wants things done one way and a hiring manager, who wants a person onboard.
Posel said ClearPath has software that provides an online questionnaire for both the hiring manager and the prospective contractor to come up with a recommendation on whether the person should work as a contractor or as an employee. If the person qualifies, the staffing buyer can contract with the he worker directly. Otherwise, ClearPath can payroll that person and become the employer of record.
In addition to Woolsey and Andrews’ bill, other proposed federal legislation dealing with misclassification of workers includes H.R. 5804 and S.2044.

S.2044, the Independent Contractor Proper Classification Act of 2007, would allow the Internal Revenue Service to issue regulations and ruling on independent contractor status and require employers to notify independent contractors of their tax obligations and right to seek a determination of their status from the IRS. The bill would also end industry practice as a justification for misclassifying workers and would require information on challenging a classification to go on workplace posters required by the Fair Labor Standards Act. The bill was introduced by Barack Obama in September.

Rep. Jim McDermott, D-WA, on April 15 put forward the Taxpayer Responsibility, Accountability and Consistency Act of 2008, H.R. 5408. It would allow for a determination of workers’ employment status and prevent retaliation against the workers. The bill would also require the Secretary of the Treasury to issue an annual report on the effects of misclassification. H.R. 5408 was referred to the House Committee on Ways and Means.

In addition to federal legislation, the American Staffing Association reported that several states have made worker misclassification a priority this year.

Staffing Industry Analysts’ perspective
A tightening up of legislation regarding worker misclassification is a two-edged sword for the staffing industry. Staffing firms treating workers as independent contractors may need to review their processes and make sure they are following best practices, to steer clear of penalties. But, more importantly, so will everyone else. Many companies may decide that the safest best practice is simply to use staffing firms to handle contingent workers. Such legislation could therefore be a boon to the industry. 

About ClearPath
ClearPath is a leading HRO with a focus on the contingent labor market. With 17 years of experience our contractor management and payroll programs include: Employer of Record (ClearPath hires your contractors as our own W-2 employees); Agent of Record services (billing and payment consolidation for Independent Contractors); Direct Source (leveraging your brand to drive internal recruitment); and Independent Contractor compliance solutions. With ClearPath, companies can efficiently and cost –effectively engage, retain and manage the talent they need, while mitigating the risks associated with contingent workers.