As the crackdown on 1099 independent contractor misclassification continues to intensify, Congress has reintroduced legislation to help stop misclassification.
The Employee Misclassification Prevention Act was originally introduced in June 2010. The 2011 version contains the same provisions as the original. If passed, it will:
- Require companies to provide written notice to workers informing them whether they have been classified as an “employee” or “non-employee” and directing them to a Department of Labor Web site that will explain their rights.
- Require companies to keep records of hours and wages on non- employees if they are required to do so for employees.
- Make misclassifying workers a federal offense.
Penalties for violating these provisions would range from $1,100 to $5,000 per worker. The Act would also impose triple damages for willful violationsof minimum wage and overtime laws when an employee has been misclassified.
The law firm Pepper Hamilton LLP does a good job of analyzing the EMPA on its Web site. Here are some key points they make in their article:
- The act punishes both willful and unintentional violations. This is in contrast to the recent California Independent Contractor Law that only prohibits willful misclassification.
- Companies may be relieved from liability under the safe haven created under Section 530 of the Revenue Act of 1978. The IRS also recently announced theVoluntary Classification Settlement Program that allows companies to only pay a small amount of back taxes owed for misclassified independent contractors if they voluntary reclassify the workers. These methods only protect companies from liability under federal employment tax laws, not from other federal and state laws against misclassification.
- State and federal governments are getting more aggressive about worker misclassification enforcement, so it is important that if companies use independent contractors, that they re-evaluate these classifications to ensure they are in compliance.
- Most misclassification violations are brought to light by the independent contractors themselves. The most common way is that they apply for unemployment, which they are not eligible for as independent contractors. We outlined other common triggers for worker misclassification audits in a previous blog post.