U.S. Department of Labor (“DOL”) Secretary, Hilda L. Solis, and the Internal Revenue Service (“IRS”) Commissioner, Douglas M. Shulman, signed a Memorandum of Understanding last week that is intended to improve their agencies’ coordination on misclassification issues and, ultimately, increase both agencies’ scrutiny of businesses which misclassify employees as independent contractors.

The DOL and IRS’ Memorandum of Understanding arises out of the DOL’s “misclassification initiative” to prevent, detect, and remedy employee misclassification. Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington have signed Memoranda of Understanding with the DOL’s Wage and Hour Division, and Hawaii, Illinois, Montana and New York have announced plans to sign similar agreements. Florida may join the misclassification initiative in the future.
The Memorandum of Understanding enables the DOL and the IRS to share information with each other regarding worker misclassification. This may lead to multi-pronged scrutiny and enforcement proceedings from the DOL, IRS and, potentially, various state agencies. Secretary Solis confirmed the agencies’ joint message: “We’re standing united to end the practice of misclassifying employees.”

As a result of the “misclassification initiative,” a worker who is classified as an independent contractor does not have to bring a claim against his or her employer alleging misclassification. Instead, the DOL, IRS and/or state agency may initiate a directed investigation which is essentially an unfettered investigation into an employer’s classification of its workers and, potentially, all of the employer’s payroll practices. In short, an audit of payroll practices. In 2012, the DOL’s Wage and Hour Division plans to increase the percentage of DOL-directed investigations to approximately 35% of all its investigations.
What does the Memorandum of Understanding and the “misclassification initiative” mean for employers? Employers who use independent contractors must be prepared to defend its classification of these workers as independent contractors or risk exposure to liability for unpaid overtime (where applicable), unpaid payroll and related taxes and withholdings, as well as liquidated damages, fines, penalties and, potentially, attorneys’ fees and costs.

The firm’s Labor and Employment Practice Group is available to assist employers with internal worker classification audits and can answer your questions regarding worker classification and other wage-and-hour issues, including without limitation, exemptions from overtime arising out of the Fair Labor Standards Act.