The U.S. Department of Labor (“DOL”) signed a memorandum of understanding this week with the Internal Revenue Service (“IRS”) in an effort to end misclassification of employees. Leaders from 7 states also signed memorandums of understanding with the DOL’s Wage and Hour Division. The states who will be working with the DOL include Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington. Four other states, including New York, Hawaii, Illinois and Montana are also expected to sign memorandums of understanding. Our firm has helped many companies evaluate and correctly classify their workers in accordance with state and federal guidelines to avoid fines, penalties and taxes.
The memorandums of understanding will allow the Labor Department to share information and coordinate law enforcement with the IRS and the 11 states to ensure that employers follow state and federal labor laws. By working together, the Labor Department will be able to target companies that misclassify employees as independent contractors in order to avoid paying minimum wage and overtime pay. Businesses also misclassify employees in order to avoid paying workers compensation, unemployment insurance and federal taxes.
With the DOL, the IRS and the states sharing information, the state and federal government will be able to inflict multiple fines and penalties on companies engaged in violating state and federal employment laws. Patricia Smith, an attorney at the DOL, stated that there’s “more of an incentive to be in compliance because the cost of what we consider to be illegal activity has increased.” For example, in the past, if a company was found guilty of not making unemployment insurance payments, it would incur a fine from just the state agency. Now, it would be hit with not just state fines, but also federal fines and penalties as well as any tax violations.
Aggressive enforcement and cracking down on labor law violations has been a major priority for Labor Secretary Hilda Solis since she took over the Labor Department in 2009. The DOL collected about $4 million in back wages in 2010 on behalf of about 6,500 misclassified employees. This amount was a 400 percent increase from the amount collected in 2008. Solis has also made it a point to go after the industries who are known for misclassification of employees, such as the restaurant, hotel, health care, and day care industries.
Misclassification of workers is a huge problem in many industries, which not only robs workers of their rightful wages but amounts to theft from the government and all taxpayers across the country. A 2009 report from the Government Accountability Office showed that misclassification of workers cost the government $2.72 billion in 2006. The report also found that about 30% of employers misclassify their employees as independent contractors to avoid paying overtime and minimum wage.
If your company employs independent contractors, make sure you are in compliance with state and federal labor and employment laws. The government’s new initiative can have severe financial consequences if you are found to be in violation of any labor laws.
Call our Labor and Employment Attorneys at Villanueva & Sanchala at (800) 893-9645 to help you evaluate your company to ensure that your employees are classified correctly.
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