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Obama’s Budget Targets Misclassification of Independent Contractors

Mess Media, February 2, 2010

President Obama’s budget for the 2011 fiscal year (which begins October 1) seeks to limit widespread abuses by employers who misclassify employees as independent contractors in order to evade their responsibilities.

In a video chat, Labor Department Secretary Hilda Solis noted that a budget is much more than numbers. It “is an expression of the department’s priorities.” Solis was clear that one of the Labor Department’s top priorities will be the independent contractor issue.

As part of the 2011 Budget, the Departments of Labor and Treasury are pursuing a joint proposal that eliminates incentives in law 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.

The Labor department would receive about $25 million and 100 additional enforcement personnel to work in support  of a new “multi-agency initiative to dramatically strengthen and coordinate federal and state efforts to address employer misclassification of workers. “
Jane Oates, assistant secretary of the Employment and Training Administration said that “the goal is to improve capacity to identify misclassification through increased information sharing and targeted audits in high-risk industry sectors. These efforts will prevent misclassification, increase statutory enforcement where appropriate, and enable collection of payroll taxes previously lost due to misclassification, such as in the Unemployment Insurance program.”

Deputy Administrator of the Wage and Hour Division, Nancy Leppink added that “the Joint Labor-Treasury Initiative would also address the failure to pay minimum wage and overtime due to misclassification of employees.”  When employees are misclassified as independent contractors, they are deprived of benefits and protections to which they are legally entitled. For example, independent contractors do not receive overtime and are ineligible to receive unemployment benefits.

Misclassification also has a budgetary impact, reducing receipts in Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds. According to the budget the joint effort would increase Treasury receipts by more than $7 billion over 10 years.

The budget measures also add support to proposed legislative changes that close the loophole that allows employers to avoid paying Social Security and Medicare taxes, withholding income taxes and contributing to workers’ compensation and unemployment insurance. 

The Taxpayer Responsibility, Accountability and Consistency Act of 2009, introduced by Senator John Kerry last December, would eliminate the “Safe Harbor” provision that allows employers to misclassify workers as independent contractors for tax purposes without undergoing the common law test of their status.

"I'm pleased the budget addresses this issue head-on," Kerry said in a statement. "The best way to level the playing field for America's workers is by ensuring that they get the protections they deserve and make an honest day's pay for an honest day's work."

According to the U.S. Department of Labor, as many as 30 percent of all employers misclassify their employees as independent contractors.

See also:

Obama Introduces Independent Contractor Legislation - Mess Media September 28, 2007