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The stakes keep getting higher for companies that misclassify workers as 1099 independent contractors (ICs) when they should be W-2 employees.

The 2015 Fiscal Year Budget, which was recently released and takes effect in October 2014, allocates $14 million to the Department of Labor (DOL) for preventing and detecting independent contract or misclassification.  While $4 million will go to hiring more investigators, the bulk of the money ($10 million), will fund grants to help individual states identify misclassification and recoup unpaid taxes. This is no surprise. Through its Misclassification Initiative, the DOL has signed Memorandums of Understanding with the IRS and several states agreeing to share information about possible misclassification. As a result of the Initiative, the DOL has already collected over $18.2 million in back wages for more than 19,000 workers.  According to Secretary of Labor Thomas E. Perez, this is a 97% increase in back wages since the implementation of the Initiative.
Recruiters often receive pressure from both companies and candidates to use the IC classification due to the tax advantages that can be enjoyed by both parties. The IC classification will likely become even more popular with clients when the employer mandate of the Affordable Care Act (ACA) kicks in. But it’s not up to the client, candidate, or recruiter. Proper classification is determined by the IRS guidelines, which can be reviewed at

The DOL’s Misclassification Initiative has significantly increased the legal and financial risks of misclassification, especially for companies that could now be hit with fines, penalties, back taxes, back wages, etc., from several agencies at once. Don’t let your clients fall into this trap. If they have ICs, encourage them to audit their workforce against the IRS guidelines. If they have workers that are misclassified, you can help them by offering to convert those ICs to W-2 employees and outsource their employment to a provider of recruitment back-office solutions. That way, your clients can still escape the administrative and financial burdens associated with employing the workers without the risks involved with making them ICs.

This article is for informational purposes only and should not be considered legal advice.

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