Government contractors, beware misclassification of workers

Since 2009, the U.S. Department of Labor (DOL) has been cracking down on misclassification of workers. The DOL has just issued another document that confirms its determination to enforce those provisions of the Fair Labor Standards Act and the Internal Revenue Code that require employers to do the following for employees (but theoretically not for independent contractors):

Withhold income taxes on the employee’s wages.
Withhold Social Security taxes (FICA) and withhold Medicare taxes.
Transfer the withholdings to the Internal Revenue Service (IRS).
Pay unemployment compensation taxes (FUTA).
Pay the employer’s share of Social Security and Medicare taxes.
The document is a memorandum issued by David Weil, the administrator of the Wage and Hour Division of the DOL and stresses that businesses need to start with a presumption that a worker is an employee.

Businesses often try to classify workers as independent contractors because it saves the employer money: the employer does not have to pay Social Security and Medicare taxes for independent contractors. Paperwork is also reduced because the business doesn’t have to withhold income tax, Social Security tax, or Medicare tax and prepare the forms necessary to transfer the withholdings to the IRS.

Although the DOL began a crackdown on misclassification of workers in 2009, the crackdown intensified when the IRS joined the effort in 2011. Efforts intensified when the Alabama Department of Labor (ADOL) signed a memorandum of understanding in 2014 that allows the two agencies (IRS and ADOL) to cooperate in exposing misclassifications. So now both the IRS and the ADOL will be helping the DOL ferret out misclassifications of workers as independent contractors.

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