The federal government plans to use a small army of newly trained agents to audit 6,000 companies in a nationwide crackdown on misclassification of independent contractors by employers. Construction firms could be hit hard by the enforcement actions and regulatory changes contemplated by federal and state governments desperate for funds to close budget deficits.
The Obama administration has tasked the Dept. of Labor and the Internal Revenue Service with increasing enforcement this year and is calling for additional resources in the 2011 federal budget. Last year, the Dept. of Labor added 250 new investigators hired within its Wage & Hour Division. The IRS budget, signed by the President in December, strongly urges the IRS to increase tax enforcement “in industries where misclassification of employees is widespread.”
Meanwhile, the proposed 2011 federal budget calls for additional resources for enforcement, including $12 million to hire 90 additional enforcement staffers at the Dept. of Labor. The Obama administration’s budget estimates these efforts could yield $7 billion in additional Treasury receipts in 10 years.
“We’ve been expecting initiatives like this for a while, and we think it’s about to hit us,” says Denise Gold, associate general counsel for labor and employment law at the Associated General Contractors of America. “There’s a theme of fiscal responsibility to this, where the agencies can enforce or tighten up existing law and get more revenue into Treasury without hitting up the taxpayers.”
Leaders on Capitol Hill are echoing the call, proposing legislation that could increase penalties for misclassification and alter existing employer protections. In Dec. 15 statements regarding the proposed Taxpayer Responsibility, Accountability and Consistency Act of 2009, Sen. John Kerry (D-Mass.) called for “addressing the current loophole” in the 1978 Revenue Act’s Section 530, commonly known as “safe harbor.” Under the bill, safe harbor would be “narrowed to reduce abuses,” he said.
The legislation has drawn praise from some in the industry, including the Sheet Metal and Air Conditioning Contractors’ National Association, which says the bill could help level the playing field in bidding. “When a company that is following all the rules goes up against someone that is not withholding, that is blatantly unfair because they are saving as much as 30% on payroll,” said Stan Kolbe, SMACNA director of government affairs.
| Executive Branch Initiatives: |
|---|
| Funding for staff increases within THE DePT. of Labor, Wage & Hour Division |
| FY 2009 budget—$17 million to hire an additional 75 employees. |
| FY 2010 budget—$32 million to hire an additional 288 employees |
| FY 2010 budget (proposed)—$25 million to hire an additional 100 employees |
| IRS Directive |
| President Obama signed an Internal Revenue Service FY 2010 budget that “strongly urges the IRS to increase tax enforcement in industries where misclassification of employees is widespread.” |
| Estimated Outcome |
| The proposed FY 2011 budget estimates increased enforcement efforts could yield $7 billion in additional Treasury receipts after 10 years of stringent efforts. |
| Legislative Initiative |
| The Taxpayer Responsibility, Accountability and Consistency Act of 2009 would narrow “safe harbor” provisions under Section 530 of the 1978 Revenue Act to close loopholes. |
| Estimated Impact of Misclassification |
| A 2000 Dept. of Labor study shows that up to 30% of firms misclassify employees as independent contractors. |
| Between 1996 and 2004, an estimated $34.7 billion of federal tax revenues went uncollected due to worker misclassification, according to a Coopers & Lybrand study. |
| Source: The Obama Administration |
Adding fuel to the debate, Kerry claimed the rate of misclassification in his home state of Massachusetts had risen to 13.4% during 2001-2003 from 8.4% during 1995-1997. A 2000 Dept. of Labor study showed that up to 30% of firms misclassify employees as independent contractors.
As the number of abuses has risen, so has the legal effort to go after them, says Maury Baskin, general counsel to the Associated Builders and Contractors. Just as the federal government is looking to amend its regulations, Baskin says regulations are in flux at the state levels as well.
“We’ve seen a number of class-action cases in recent years where they are go-ing after employers and affecting a lot of small businesses that don’t have the resources to pore over new regulations,” he says.
Baskin notes that “tests” to determine a worker’s status differ among the IRS, the Dept. of Labor and some state agencies. The Taxpayer Responsibility, Accountability and Consistency Act of 2009 would further alter the IRS test.
“What contractors really need is clearer guidance,” he adds.
Enforcement efforts are also on the rise in many states. A spokeswoman for California Attorney General Edmund Brown says his office has been monitoring pay issues such as illegally misclassifying employees as independent contractors. California is pursuing construction firms over independent-contractor classification issues, and the state also pursued some port truckers over similar issues last year.
The case of a Bakersfield, Calif., drywall contractor who was charged last year for violating workers’ rights could be settled in the next month, according to the company’s attorney. In January 2009, the attorney general charged Charles Evleth Construction Inc. with underpaying 300 employees, ordering $3.13 million in restitution for lost wages and benefits and imposing $1 million in civil penalties.
An attorney for Evleth, Barry Goldner, said the company paid a per-piece pay-rate for services. He contends, “The violations were more of a technical issue.” Evleth Construction is still in business in Kern County, Calif.
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