On November 18, 2013, the U.S. Department of Labor’s (“DOL“) Wage and Hour Division, the New York State Labor Department and the New York State Attorney General Eric T. Schneiderman’s Office today signed memoranda of understanding to protect the rights of employees by preventing their misclassification as independent contractors or other nonemployee statuses.
The DOL Wage and Hour division has a long tradition of fighting employees’ misclassification. Employees’ misclassification often occurs in construction business where employers take advantage of the fact that misclassifying employees as independent contractors result in a 20-30% cost savings per worker. The International Revenue Service (“IRS”) estimates that employers misclassify millions of workers as independent contractors instead of employees, thus avoiding the payment of employment taxes.
However, the misclassification as something other than employees has serious consequences for the affected workers because they are denied benefits and protections, which are normally owed to employees. Those lost benefits may include: family and medical leave, overtime, minimum wage, workers’ compensation and unemployment insurance. Besides, employees’ misclassification also impacts the Treasury and the Social Security, Medicare Funds, as well as to state unemployment insurance and workers compensation funds. Businesses that misclassify their workers fail to withhold regular payroll and withholding taxes for their employees. Practically, this means that the employer’s share of taxes is not paid and the employee’s share of taxes is not withheld (because independent workers are not accounted for in the payroll deductions system). According to the IRS, the government is losing millions of dollars in uncollected payroll, social security, Medicare, and unemployment insurance taxes because of misclassification of independent contractors by taxpayers.
One explanation for this phenomenon is that employees are expensive. The cost of withholding federal income, Social Security, Medicare and unemployment taxes along with the expense of employee benefits are difficult in a competitive market. Therefore, a lot of companies try to avoid hiring permanent employees and would rather continue with, cost efficient, independent workers.
Laura Fortman, the principal deputy administrator of the DOL Wage and Hour Division stated that: “these memoranda of understanding send a clear message that we are standing together with the State of New York to protect workers and responsible employers and ensure everyone has the opportunity to succeed.”
The role of this partnership will be to ensure that the U.S. Department of Labor‘s Wage and Hour Division, the New York State Labor Department and the New York State Attorney General work aggressively to enforce federal laws and states laws and to ensure a level playing field for employers who play by the rules. It should be noted that in the last two years, the Wage Hour Division has secured over $18.2 million in back wages for more than 19,000 workers where the primary reason for minimum wage or overtime violations under the Fair Labor Standards Act was that workers were not treated or classified as employees.
If you are a worker and you believe you have been misclassified as an independent contractor, please contact the Harman Firm, LLP.