Worker Misclassification: DOL Testimony & New Legislation

Worker misclassification is the practice of treating a worker who is an employee under the law as something other than an employee, thus depriving the employee of rights and benefits to which they are entitled, a practice called “widespread and harmful” by the Department of Labor.

“The issue has become an increasingly common problem resulting in workers being denied benefits; an unfair advantage for employers who intentionally misclassify workers as independent contractors; and state and federal governments losing tax revenue” according to Seth D Harris, Deputy Secretary of the DOL.

The results of such misclassification include:
• It is estimated that up to 30% of businesses across all industries misclassify workers.
• 10.3 million workers are classified as independent contractors (7.3% of workforce).
• When an employee is misclassified as an independent contractor it is estimated that they reduce their labor costs by 20-40%.
• Federal & state coffers suffer as billions of dollars in unpaid revenues go un-captured.
• Law-abiding employers are also hurt by businesses that do not properly classify.

To address the problem, there is a newly proposed piece of legislation called the “Employee Misclassification Prevention Act”. There is not consensus on this direction, as there may be negative consequences associated with the additional administrative responsibilities and associated costs.

For more details:

• Senate Committee Holds Hearing on Worker Misclassification

• Watch the Full Committee Hearing — “Leveling the Playing Field: Protecting Workers and Businesses affected by Misclassification” (Video)

• Employee Misclassification Prevention Act (H.R. 5107, S. 3254)

• Statement of Seth D Harris, Deputy Secretary U.S. Department of Labor, Before the Committee on Health Education, Labor, and Pensions U.S. Senate. – June 17, 2010

Economic Realities Test

Whether a worker is an employee or an independent contractor depends on the nature of the employment relationship. The “economic realities” test must be applied by employers to determine the nature of their relationship with their workers under the Fair Labor Standards Act (FSLA). Under that test, employers must consider the following factors when determining whether a worker meets the statute’s definition of “employee”: 

• The extent to which the services rendered are an integral part of the employer’s business;
• The permanency of the relationship;
• The amount of the worker’s investment in facilities and equipment;
• The nature and degree of control by the employer;
• The worker’s opportunities for profit and loss;
• The amount of initiative, judgment, or foresight in open market competition with others required for the worker’s success; and
• The degree of the worker’s independent business organization and operation.

For more information regarding the definition, see the DOL’s article:
• Who Is an Employee? Determining Independent Contractor Status