Worker Misclassification to Receive Heightened Scrutiny

Over the past year, federal and state governmental agencies have signaled their intent to more seriously investigate the misclassification of employees as independent contractors. For various reasons, employers often find it desirable to classify certain workers as independent contractors. Independent contractors are not covered by most employment laws because they are not employees. Additionally, classification of individuals as independent contractors deprives federal and state governments of tax revenue for such individuals, as they are not subject to payroll taxes. For instance, the federal government lost an estimated $34.7 billion in tax revenue between 1996 and 2004 due to such classification of workers. While there are instances where individuals are legitimately classified as independent contractors, such individuals are often in fact misclassified employees. Motivated by budget shortfalls and declining tax revenue, state and federal agencies have begun to aggressively police such instances of misclassification in an effort to recover lost revenue. Penalties for misclassification are severe and can put a company out of business.