Growing Scrutiny of Independent Contractor Classification

Date: May 26, 2010

In order to effectively leverage the potential contracting opportunities of BRAC, businesses need to be able to draw upon a skilled workforce at a moment's notice. Of course, given the vagaries of the government contracting process, oftentimes it is not financially practical for a business to maintain a full time complement of employees. Rather, many businesses engage independent contractors, which give a business the flexibility of quickly ramping up to meet the needs of its customers without costly overhead.

Unfortunately for the unwary contractor, federal and state agencies have begun to crack down on the use of independent contractors. Specifically, government authorities, concerned about the potential misclassification of employees as independent contractors, are stepping up investigation efforts and imposing stiff penalties. And small businesses in particular will be a major target for the IRS effort, reports BusinessWeek, because these organizations typically do not have the attorneys and tax consultants employed by large businesses to maneuver through the complex rules governing classification or the financial wherewithal to defend the business through a lengthy investigation. Additionally, government contractors of all sizes appear to be under stricter scrutiny as well. For example, a Connecticut labor union may have prodded Connecticut state officials to investigate possible misclassification by a Skanska unit on a UConn construction project. Undoubtedly, the government contractor's substantial payroll and subcontracting reporting requirements present ample fodder for these independent contractor misclassification investigations.

And with the recent introduction of H.R. 5107 in the U.S. House of Representatives amending the Fair Labor Standards Act to impose additional recordkeeping requirements on businesses that utilize independent contractors on both public contracts and for private work, more scrutiny and greater fines may be on the way. Potential new requirements include the maintenance of records of the hours of independent contractors and the amounts paid to the independent contractor. Additionally, civil penalties could be increased to $5,000 per misclassified worker.

These increased enforcement efforts and the potential tightening of related regulations are aimed at what is believed to be a significant, costly problem for workers and for federal and state governments. Some businesses purposely misclassify employees as independent contractors to avoid payroll taxes and workers compensation and unemployment insurance premiums. Many other businesses misclassify out of a failure to understand the law. Either way, the practice is believed to cost federal and state governments millions in tax dollars.

In order to avoid liability for misclassification, employers must understand the requirements and restrictions and take the necessary steps to ensure that those requirements and restrictions are properly implemented before classifying any personnel as an independent contractor.

Dennis Robinson, an attorney in WTP's Baltimore office, has been tracking this issue. He recently wrote an article for the Winter 2010 issue of the Whiteford, Taylor & Preston Construction Newsletter, addressing the Maryland Workplace Fraud Act of 2009, which imposes civil penalties of up to $20,000 per employee for knowing misclassification of workers in the construction and landscaping industry.