Employee or Independent Contractor? A Distinction with a Difference
The recession has made many Americans understandably desperate for employment. Some money-hungry employers take advantage of this desperation by misclassifying new hires as independent contractors rather than employees. You know how people sometimes talk about distinctions without a difference? The distinction between independent contractors and employees is not one of those meaningless distinctions.
Misclassifying an employee as an independent contractor can have dire consequences for the worker. Independent contractors who are injured on the job are not eligible for workers’ compensation. Independent contractors are also not eligible for minimum wage, overtime, unemployment insurance, and any benefits an employer offers to his or her employees, such as health care or vacation benefits. Even worse, the workers who are most frequently misclassified as independent contractors work in low-wage industries such as construction, home health care, landscaping, and delivery services—so they are precisely the people who need employment protections the most.
Although employers that engage in independent-contractor misclassification certainly save money, society as a whole does not benefit. The government loses tax revenue when employers misclassify their employees, and competing businesses suffer when misclassifying employers game the system.
What is being done to fight this problem? On the federal level, the Wage and Hour Division of the U.S. Department of Labor maintains a helpful website outlining the federal government’s response to independent contractor misclassification. The Department of Labor is fighting misclassification through a multi-pronged Misclassification Initiative. As part of that initiative, in 2011 the Department of Labor and the Internal Revenue Service entered into an agreement to “work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.” The Department of Labor has also signed memoranda with individual states outlining plans to cooperate on this issue.
In addition to working with the Labor Department, some state and local governments are tackling independent-contractor misclassification on their own. The range of state and local approaches to this problem is broad; some states, such as Illinois, have passed their own laws to reduce independent-contractor misclassification. Some states have created task forces to fight the problem through investigating alleged misclassification, filing lawsuits, and educating employers and workers about their rights and responsibilities. And some states have given their labor departments more budget dollars to crack down on this problem.
As Andrea Vaughn of the Public Justice Center discussed in a recent issue of Clearinghouse Review, Maryland has both passed a law prohibiting independent-contractor misclassification and created a task force to fight it. In her article, Identifying Misclassified Workers: Lessons Learned from Maryland’s Workplace Fraud Act, Vaughn describes the independent-contractor misclassification problem generally as well as the history behind Maryland’s 2009 law, the Workplace Fraud Act. Vaughn observes that “[t]he strength of the opposition that the Act has faced—both before and after its passage—shows the potential power that this type of legislation bears against unscrupulous employers.” Advocates for low-income workers should take note of the Maryland act and develop a nuanced understanding of independent-contractor misclassification so that they can address this problem in their own work.
