During January we  noted the government’s continued focus on proper worker classification, Although the two bills referenced – the Fair Playing Field Act of 2010 and the Employee Misclassification Prevention Act – were not enacted during the 2010 session, this is still a hot topic, and they will likely resurface in some form with the 2011 session. During President Obama’s recent State of the Union address the President made mention of his continued focus on efforts to eliminate tax loop holes and reduce the tax gap resulting from misclassified workers, and how this activity will also aid in balancing the budget.

There are many economic and business advantages of using independent contractors, freelancers, consultants, free agents and seasonal workers – but along with the benefits of independent contractor use, there are also pitfalls. Some businesses might knowingly misclassify employees as independent contractors, but other businesses may mistakenly misclassify workers. Regardless of whether or not misclassification is done with intent, any worker not classified as a W2 employee must be defended and if misclassified, the end result can be quite costly.

Companies that use independent contractors to supplement their workforce or rely on a business model that includes a large subset of independent contractors need to implement strategies to ensure proper classification to minimize their risk and the costly consequences of misclassification. While the precise extent of misclassification is unknown, estimates suggest that it affects 10 percent to 30 percent of all employers.  The DOL spoke of its partnership with the Department of Treasury to jointly coordinate efforts to detect and deter the misclassification of employees and to strengthen and coordinate federal and state efforts to enforce labor law violations arising from misclassification.

Conducting regular compliance audits ensure workers are classified correctly, implementing a contractor compliance program, building and maintaining compliance files for each contractor, and monitoring the landscape for changes in legislation and legal precedence, are critical to mitigating risk.  More and more companies are seeking compliance experts to conduct risk assessment audits and manage contractor compliance programs.

The use of independent contractors is a viable business strategy. As employee misclassification continues to be at the forefront of state and federal agencies as a mechanism to generate revenue and aid in balancing budgets, organizations must ensure they properly classify workers, build defensible files for all independent contractor, and manage independent contractors appropriately to reduce the risk of re-classification.