Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
During Tuesday’s Senate Subcommittee hearing – Payroll Fraud: Targeting Bad Actors Hurting Workers and Businesses – Senator Robert P. Casey, Jr. (D-PA) announced that he, along with Senators Tom Harkin (IA) and Sherrod Brown (D-OH), had that day introduced the Payroll Fraud Protection Act of 2013 (S. 1687), a bill that would “hold employers accountable” for independent contractor misclassification. This hearing occurred just days after the Department of Labor (DOL) sent its proposed Worker Classification Survey to the Office of Management and Budget (OMB) for review and approval. The proposed survey will likely provide the groundwork for the future “right-to-know” rule that would amend an employer’s recordkeeping requirements under the Fair Labor Standards Act (FLSA) to provide employees with greater information about their employment status.
Payroll Fraud Protection Act
Hearing witness Cathy Ruckelshaus, General Counsel of the National Employment Law Project, said that the Payroll Fraud Protection Act “would provide important transparency for workers and their employers,” and enable workers to question their designated employment status if the notification appeared incorrect or was confusing.
As she further explained in her testimony, the bill – as originally introduced in 2011 – would do the following:
amend the recordkeeping requirements of the [FLSA] to require employers to notify all employees and non-employees who perform services for remuneration of their status, would establish a presumption that an individual is an employee under the FLSA if the employer violates the notice requirements; and would provide for the imposition of civil penalties. The bill would also amend the Social Security Act to require state unemployment insurance programs to implement investigative procedures and establish penalties for misclassification; would require the [DOL] to measure state performance in this independent contractor misclassification enforcement when conducting unemployment compensation tax audits; would require information-sharing within the DOL regarding possible independent contractor abuses under the FLSA, and authorize the sharing of such information with the IRS; and would require that targeted audits conducted by the Wage & Hour Division include industries with frequent incidence of employee misclassification.
Casey emphasized that the version he introduced also includes anti-retaliation provisions that would impose civil penalties and sanctions on employers that discharge or discriminate against individuals based on their opposition to any practice concerning their own classification.
According to Casey, misclassifying employees as independent contractors is “a problem cheating workers, employers, and taxpayers.” Among other problems created by misclassification, Casey explained, is independent contractors are not entitled to such benefits as workers’ compensation, unemployment, “and other basic safeguards.” This creates an “uneven playing field” for law-abiding businesses that are forced to bid against companies that do not incur the same labor costs.
Casey emphasized, however, that independent contractors “serve a valuable role in the economy,” and therefore the intent of the hearing was not to use “an overly broad brush to point fingers at companies that are following the law.” Intentional misclassification, however, is “a widespread occurrence and a problem that must be addressed.”
At the outset of the hearing, Casey cited a 19-year-old study finding that 3.4 million employees are misclassified, resulting in costs to taxpayers exceeding $1.6 billion in lost income, unemployment, and other payroll-related taxes. He also cited a June 2013 report issued by the Inspector General of the Treasury, which states: “the IRS estimates that employers misclassify millions of workers as independent contractors,” which allows employers to avoid paying a significant amount in employment taxes. On average, the report states, an employer can save $3,710 per worker per year in employment taxes on an average salary of about $40,000 by misclassifying the worker as an independent contractor. Thus, there is “a clear financial incentive for bad actors to defraud taxpayers.”
Other panelists cited additional studies. Ms. Ruckelshaus referenced a study commissioned by the DOL in 2000 which found that up to 30 % of employers misclassify their employees as independent contractors, and that various state studies indicate this number could be as high as 47 percent. She said that the DOL has commissioned a new study that will provide updated data. She noted also that a 2009 study conducted by the Government Accountability Office (GAO) estimated that independent contractor misclassification abuses resulted in a loss of federal revenues of $2.72 billion in 2006. A Congressional Research Service (CRS) study estimated that a modification to the IRS safe harbor rule would save an estimated $8.7 billion from 2012 through 2021 on the income tax side.
Other witnesses testified that contractors that intentionally misclassify their employees are able to undercut their bids by as much as 20-30 percent.
A complete list of panelists and links to their testimony can be found here.
Worker Classification Survey
According to the Federal Register notice,
The DOL intends to administer a survey to collect information about employment experiences and worker knowledge as to basic employment laws in order to understand employee experiences with worker classification issues. More specifically, the DOL plans to compile an analytical research report on the findings and results of a nationally representative survey of workers. The DOL will also report on a qualitative study of employers that includes results from in-depth employer interviews.
As previously noted, the agency has on its long-term agenda a proposal to require employers to disclose to workers their status as the employer's employee or some other status, such as an independent contractor, and if an employee, how their pay is computed. The Worker Classification Survey would likely provide the agency with justification to proceed with this rulemaking.
The DOL previously released a draft of its survey for public comment in January of 2013. The updated survey likely addresses the comments submitted. The agency is continuing to solicit public input about this survey until December 9, 2013. Comments must contain the ICR Reference Number 201303-1235-002, and may be submitted to the Office of Information and Regulatory Affairs, Attn: OMB Desk Officer for DOL-WHD, Office of Management and Budget, Room 10235, 725 17th Street NW., Washington, DC 20503. Alternatively, comments may be sent via email to: OIRA_submission@omb.eop.gov.