Contingent Workforce Solutions

January, 2010 - 2011 Budget Targets Misclassification of Independent Contractors

As part of the 2011 Budget, the Departments of Labor and Treasury are pursuing a joint proposal that eliminates legal incentives for employers to misclassify their employees; enhances the ability of both agencies to penalize employers who misclassify; and restores protections to employees who have been denied them because of their improper classification. This proposal would increase Treasury receipts by more than $7 billion over 10 years. The 2011 Budget for [the Department of Labor] includes an additional $25 million to target misclassification with 100 additional enforcement personnel and competitive grants to boost States' incentives and capacity to address this problem.

The budget proposal follows previous efforts by President Obama to address the issue of worker misclassification. As a Senator, President Obama introduced legislation similar to the current budget proposal that would make it more difficult for businesses to treat individuals as independent contractors rather than employees. Later versions of this legislation are now pending in Congress. Sen. John Kerry (D-MA) and Rep. Jim McDermott (D-WA) have introduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882, H.R. 3408) (See also Spotlight Blog December, 2009), legislation that would revise the Revenue Act of 1978's "safe harbor" provision to make it more difficult for employers to classify workers as independent contractors for employment tax purposes, and significantly increase employer penalties in the event of misclassification, among other things. The President's budget proposal is expected to build momentum for such legislation and bring greater scrutiny to independent contractor classification.

The misclassification of workers as "independent contractors" when they should really be treated as employees has been a persistent problem for decades. But concerns about misclassification of workers seem likely to rise in the wake of a recession.

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