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One of the hottest topics on FoxHire‘s blog over the past year has been the government’s crackdown on employers who misclassify W-2 Employees as Independent Contractors to avoid employment costs such as unemployment, workers’ compensation, payroll taxes, and benefits. According to a recent Workforce Management article, it appears that both the state governments and the federal government are only becoming more interested in stopping worker misclassification as the new year approaches.

The Obama administration definitely is not showing signs of letting up on this issue as the president has requested $25 million in the fiscal 2011 budget for enforcement of worker misclassification regulations. In addition, the Wage and Hour Division of the Department of Labor (DOL) has hired more than 350 investigators to audit companies suspected of misclassification. The industries most often targeted include manufacturing, information technology, and home health care.

But the DOL isn’t the only agency searching for violations. State govenments, which have seen their unemployment and workers’ compensation funds take a hit due to misclassification, are also cracking down. We previously blogged about how the state of New York enacted the New York State Construction Industry Fair Play Act to combat misclassification in the construction industry. The Workplace Management article states that the state of Ohio is also considering legislation and began conducting its own audits in 2009. Of the 88 audits conducted last year, 80 companies were found to have misclassified 3,545 workers as 1099 Independent Contractors.

If that’s not enough to worry about, employers can also be slapped with class-action lawsuits, which have also increased recently. But whether it is the DOL, a state agency, or a lawyer who knocks at a employer’s door, the time and money defending against these claims can be devastating, especially to small businesses, according to Attorney David Campbell, who was quoted in the article.

“I see it all too often,” he said, “companies that are doing it right… live for months thinking their company will be shut down.”

You can help protect your clients from this threat by educating them on the proper classification of workers and offering to convert their current 1099 Independent Contractors to W-2 Employees. You can offer to put those workers on contract assignments and outsource their employment to a contracting back-office that serves as the W-2 Employer of Record. That way, your clients can still escape the administrative and financial burdens of employing their workers without the risk involved with making them Independent Contractors.

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