Yesterday, just outside Washington, D.C., state and federal workforce agency officials met to discuss their joint efforts to crack down on independent contractor misclassification.  The forum, entitled “Worker Misclassification: Federal-State Perspectives and Initiatives,” was one of the opening day’s general sessions at the National Conference on Unemployment Insurance.  (Click “More” for “Takeaways” below)

The misclassification forum included some of the leading state and federal officials tasked with thwarting misclassification of employees as independent contractors, including M. Patricia Smith, the former New York Commissioner of Labor who spearheaded the creation of New York’s Joint Enforcement Task Force on Employee Misclassification before she was appointed U.S. Solicitor of Labor by President Obama.  High-ranking workforce officials from Connecticut and New York, as well as the U.S. Labor Solicitor’s Office, also addressed officials from state and federal labor departments on the issue of independent contractor misclassification.

According to a reporter from the Bureau of National Affairs, state and federal officials were told that the “states have really been the leaders” in the misclassification initiative, but the federal government is “mobilizing.”

Today’s program includes panel discussions on a host of other unemployment insurance topics, including misclassification.  Officials from the Department of Labor from Maryland and Washington, along with the Executive Director of New York’s Joint Enforcement Task Force, are scheduled this afternoon to advise their counterparts in other states how these three states have taken steps “to detect worker misclassification and enforce state worker protection laws.”


1.  Federal/state coordination efforts in the area of independent contractor misclassification have been occurring over the past three years in a number of ways:  intra-state coordination between a state workforce agency and a state tax department; joint initiatives at the federal level between the IRS and the U.S. Department of Labor; and information sharing between the IRS and (at last count) 34 state workforce agencies.

No longer is an inquiry from a state unemployment compensation agency, asking about a worker who is seeking unemployment benefits but has been treated by a business as an independent contractor, a harmless event.  Not only are state workforce agencies predisposed to conferring employee status upon workers who have been treated as an independent contractor by a business utilizing the worker’s services, but now the upshot of such inquiries can be far-reaching.  Typically, after a state workforce agency concludes that a worker has been misclassified as an independent contractor, it requires the company to disclose to the Unemployment agency what other workers they have been treating as independent contractors.

This can lead to an Unemployment agency determination that all workers in similar positions have been misclassified, requiring the business to make back payments for unemployment insurance premiums.  Many state Unemployment agencies then refer the matter to the state Workers Compensation bureau and state Tax Departments, which assess their own penalties as well as citations for unpaid workers compensation premiums and back payroll taxes, respectively.

Concurrently, state workforce agencies have agreed to refer the matter to the IRS.  Under the IRS’s Questionable Employment Tax Practices (QETP) program, state agencies and the IRS share information about companies found to have engaged in misclassification.

Under the Memorandum of Understanding signed by the IRS and at least 34 state workforce agencies, the purposes of the QETP Program are to “facilitate cooperation and information sharing between the IRS and state workforce agencies; increase compliance with federal and state employment tax filing and payment regulations; increase compliance with Form 1099 and Form W-2 filing; increase collection of federal and state employment/unemployment tax debts; enhance efforts to reduce the tax gap at the federal and state levels; ensure that businesses are all operating on a competitive level playing field by ensuring that everyone pays their proper share of employment taxes; and leverage IRS, state and other federal agency resources to improve compliance with employment tax laws.”

Inasmuch as the issue of independent contractor misclassification arises so frequently at the state Unemployment agency level, it is no wonder that the attendees were told at yesterday’s forum that the states are leaders in this effort, even though federal government is “mobilizing.”

2.  What should prudent businesses do to protect themselves in this changing legal climate affecting the use of independent contractors?  Diagnosing whether a company has exposure in this area of the law and taking steps to enhance independent contractor compliance can minimize or eliminate most forms of misclassification liability.  Suggested ways to do so can be found in my White Paper  “Independent Contractor Misclassification: How Companies Can Minimize the Risks.”  

Written by Richard Reibstein.