The fiscal year 2011 federal budget (pdf) released on Monday contains provisions to combat misclassification of employees as independent contractors. Included in this $3.8 trillion spending measure is a proposal to be jointly administered by the Departments of Labor and the Treasury to eliminate legal incentives for employers to misclassify their employees. Funds are appropriated to enhance the ability of both agencies to penalize employers that misclassify employees as independent contractors, and restores protections to employees who have been denied them due to the misclassification. According to the budget, this proposal will increase Treasury receipts by more than $7 billion over 10 years. The budget allocates an additional $25 million to hire 100 new enforcement personnel to target worker misclassification and establish competitive grants to encourage states to address this issue.

The budget proposal follows previous efforts by President Obama to address the issue of worker misclassification. As a Senator, President Obama introduced legislation similar to the current budget proposal that would make it more difficult for businesses to treat individuals as independent contractors rather than employees. Later versions of this legislation are now pending in Congress. Sen. John Kerry (D-MA) and Rep. Jim McDermott (D-WA) have introduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882, H.R. 3408), legislation that would revise the Revenue Act of 1978’s “safe harbor” provision to make it more difficult for employers to classify workers as independent contractors for employment tax purposes, and significantly increase employer penalties in the event of misclassification, among other things. The President’s budget proposal is expected to build momentum for such legislation and bring greater scrutiny to independent contractor classification.

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