Federal agencies join forces to combat worker misclassification

On December 15, the U.S. Department of Labor’s Wage and Hour Division (WHD) and the Internal Revenue Service (IRS) signed an extension of their agreement to work together to help “enhance compliance” with employers properly classifying as workers as employees and not independent contractors. The agreement is in effect until December 31, 2028, unless ended earlier.

Agency interests

The WHD’s interest in this issue relates to compliance with employment laws such as the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), or other laws that provide employee protections. These protections do not apply to independent contractors.

The IRS’s interest in this issue relates to employers misclassifying employees as independent contractors and, thus, not withholding income taxes, social security taxes, and Medicare taxes from the wages otherwise paid to an employee, paying the matching employer portion of social security and Medicare taxes, or paying unemployment tax on employee wages.

What it means for employers

The alliance is designed to present a united front to address employment misclassification. This joint effort will help the two agencies identify where to prioritize their compliance and enforcement resources when it comes to employers’ obligations related to employment laws and tax payments.

For employers, this means that if either of the agencies discover potential worker misclassification, one agency would clue in the other, and both could work toward enforcing their respective laws.

Employment misclassification a hot topic

This issue is not new. In October, the WHD put out a proposed rule to revise its guidance on how to determine who is an employee or independent contractor under FLSA. The public comment period ended December 13.

Employers must keep in mind that the IRS and the WHD have their own separate guidance on how to determine if a worker is an employee or an independent contractor. And some states have laws that broadly define employees which increases the challenge employers have when it comes to complying.

In general terms, if someone is in business for themselves, they are more likely to be an independent contractor, but the devil is in the details. And there is no lack of details, no matter which federal agency or state law applies. The one thing employers can be certain of is, simply deciding to consider a worker an independent contractor with no guidance is risky.

Key to remember: The alliance between the WHD and the IRS presents a united front about employee misclassification. Their joint efforts will help identify compliance issues and share enforcement resources.