News & Articles


06 / 27 / 2010

Congress Considering Enactment of Employee Misclassification Prevention Act

Significant legislation aimed at curbing perceived abuses in misclassification of workers.  In particular, laws may soon be enacted that will expose businesses to significantly increased penalties, further amending the Fair Labor Standards Act (FLSA) to impose strict recordkeeping and notice requirements on businesses with respect to workers "treated" as independent contractors.  The law, known in current form as the Employee Misclassification Prevention Act (EMPA), will essentially prevent companies from misclassifying workers as "independent contractors" when such workers are really "employees."  The EMPA would direct the Secretary of Labor to establish a "misclassification" Website to enable workers to go on-line, and file complaints, andnotify them that they may have greater rights under existing state or local laws.  This would further allow the Department of Labor to forward the misclassification information to the IRS and direct the Department of Labor to conduct "targeted audits" of certain industries perceived to be where abuses in classification are occurring.  Critical aspects of this legislation would look to pierce the veil of corporations, partnerships, and LLCs owned in whole, or in part, by the worker and used to avoid the issuance of Form 1099s.

Other legislation aimed at perceived misclassification abuses is the Taxpayer Responsibility, Accountability, and Consistency Act, or TRAC Act of 2009.  If enacted, TRAC will look to limit the availability of the so-called safe harbor provisions of Section 530 of the Revenue Act of 1978.  This law, if enacted, would look to give workers the right to petition the IRS for a determination of worker's status, and increase the penalties for the intentional disregard by taxpayers of filing incorrect Form 1099s.

These legislative moves follow on the heels of a 2009 report by the GAO, and in response the IRS announced in 2010 that it was commencing an Employment Tax National Research Project to conduct line-by-line audits of 6,000 businesses focusing on, inter alia, employee misclassification.  The administration's proposed budget authorizes $25 million to the Department of Labor to target employee misclassification through the hiring of additional investigators and lawyers to pursue a joint proposal that eliminates incentives in law for employers to misclassify their employees and enhances the ability of both agencies to penalties employers who misclassify.

Practitioners and companies and workers need to monitor this area for developments.  A review or audit of any current approach by any business is considered prudent.