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"Increased Agency Information Sharing Raises Misclassification Risks"

JD Supra
December 6, 2013

On November 18, 2013, New York State joined forces with the U.S. Department of Labor in an information-sharing program that will enhance inter-agency enforcement of worker misclassification. The New York State Attorney General and Department of Labor signed partnership agreements, or memorandums of understanding, with the U.S. Department of Labor, agreeing to exchange information and coordinate enforcement efforts against companies that misclassify employees as independent contractors. The agreements state that the agencies will refer cases to one another; coordinate investigations and enforcement activities; exchange investigation leads, complaints, and referrals; notify one another about commencement of hearings, litigation, or other legal proceedings; exchange information about settlements and other case dispositions; and exchange confidential unemployment compensation information. With the signing of the partnership agreements, New York joins 14 other states that have already entered into similar agreements with the U.S. Department of Labor since September 2011, when the federal agency launched its “Misclassification Initiative.” 


New York’s partnership with the U.S. Department of Labor is only the latest in a growing trend toward data sharing efforts that raise the stakes for employers in worker-classification cases. In May 2013, the chief of the IRS Employment Tax Policy Section reported at an American Bar Association meeting that the IRS will be ramping up its pursuit of worker classification cases through its Questionable Employment Tax Practices (QETP) initiative. The QETP program was formed in November 2007 as a nationwide collaborative between the IRS and state workforce agencies to identify employment tax schemes and illegal practices. To date, the IRS and 37 states have entered into memoranda of understanding to facilitate cooperation and information sharing. The IRS has also reported that a reinvigorated QETP initiative will kick off with an increase in worker-classification audits in the first quarter of 2014.

Numerous states have formed task forces over the last few years that are focused on independent contractor relationships. For example, the New York Joint Enforcement Task Force, which consists of the Department of Labor, the Workers’ Compensation Board, the Fraud Inspector General, the Department of Taxation and Finance, the Attorney General, and the Comptroller of the City of New York, recently released its 2013 task force report detailing its initiatives and enforcement actions over the last year. The report indicates that, since its inception six years ago, the task force has identified over 88,700 misclassified workers and $1.4 billion in unreported wages. Other states such as Massachusetts, Connecticut, New Hampshire, Maryland, and Michigan have similar task forces.

The risks associated with incorrectly classifying employees as independent contractors continue to grow. Any company whose classifications of employees as independent contractors is under investigation by one federal or state agency is more likely than ever to find the classification examined by another agency and subject to penalties under multiple federal and state laws.

Employers accused of misclassifying employees as independent contractors face various risks: federal and state criminal charges, criminal and civil penalties, and liability for unpaid taxes. Given these risks, it is more critical than ever to ensure workers are properly classified as independent contractors.