Originally posted September 29, 2014 by Michael Giardina  on https://ebn.benefitnews.com.

Since the onset of the recession, there has been a surge in worker misclassification litigation and enforcement against employers that are trying to effectively manage their finances, but are incorrectly classifying their workers. There is also concern around the Affordable Care Act’s employer mandate, which may make misclassifications a tempting alternative to offering group health coverage.

The Department of Labor and the Internal Revenue oversee the federal Fair Labor Standards Act, which establishes minimum wage and overtime pay standards and how much private and public employers should pay their employees. At the state level, there are also a slew of regulations that can make any HR professional or benefit plan sponsor concerned.

Linda Doyle, trial partner at international law firm McDermott Will & Emery, says many employers with large teams of individuals in one category – such as trainers in the tech world or sales representatives in product and promotion businesses – have asked how they could come under the ACA’s coverage limits. This has been an area she’s been docking a lot of analysis in.

“There are benefits, but there are also huge costs and potential liabilities if you get this wrong,” says Doyle. “You know saving health insurance money is a way to avoid the teeth of the Affordable Care Act; it may be a laudable goal, but you may be just putting off extensive liability down the line.”

It doesn’t help that many employers are still trying to climb out from the recession.

“Particularly after the last recession, which I think we are technically are still in, there was a lot of headcount management,” Doyle explains. While noting that “‘temporary’ doesn’t necessarily mean ‘independent contractor’, or ‘work-from-home’ doesn’t mean ‘independent contractor’,” she says “there are really some employers that just don’t understand this is a category – even if the employee or individual agrees to it.”

Nancy Vary, director of the Knowledge Resource Center for Buck Consultants at Xerox, explains the ACA, and employee benefits needs in general, is an influence in these decisions.

“It all factors in, because if you’re an independent contractor, typically you’re not in a situation where you will not be receiving any kind of employee benefit,” Vary says.

In 2012, the National Employment Law Project stated that 10-30% of employers, or even more, misclassify their employees as independent contractors. This equates to millions of misclassifications and billions in revenue losses for state and federal governments. Because employers with independent contractors or other exempt employees are not tied to benefit and payments requirements levied by federal, state and local agencies, this is the conundrum, says Jeff Phelps, chief operating officer at Nelson Compliance, a consultant firm that helps employers figure out their contingent workforces.

“The problem is with independent contractors is, of course, employers are not contributing to the tax base for those individuals,” says Phelps. “That’s the No. 1 driver, that’s why you see the legislation and regulation getting tougher and more enforcement. They want to go after the misclassification issue, because they want to recover taxes that have not been made as well as [future] taxes.”

Phelps adds that typical employee protections afforded to employees such as the FLSA, Title VII of the Civil Rights Act of 1964 and the Family and Medical Leave Act are not offered to independent contractors.

The current severity of misclassification cases and costs, which employment lawyers will tell you rival what was seen in the dot-com era – especially after Microsoft agreed to pay the IRS $97 million to settle a benefits suit that included its independent contractors that were not allowed access to the company’s stock purchase plan.

“If you are an employer and you get this wrong, you have tax liability,” says Doyle. “You also have the problem that Microsoft faced years ago, if you call someone an independent contractor but they are really an employee, and your benefit plans give employees certain buckets of benefits, then you owe them those benefits.”

Under Employee Retirement Income Security Act plans, or state insurance plans, employees cannot waive their rights to benefits, says Doyle, even if they agreed to the exemption. She says a lot of employers rewrote their benefits plans in order to address the issue. But now, as 10 states enacted worker misclassification laws in 2012 and more than 14 regions did so in 2013 – including the District of Columbia – the topic is top of mind for employers.

Meanwhile, the Consolidated Appropriations Act of 2014, enacted in January, was authorized for just this purpose and the DOL has plans to award $10.2 million to fund worker misclassification detection and enforcement activities in 19 state unemployment insurance programs. “This is one of the many actions the department is taking to help level the playing field for employers while ensuring workers receive appropriate rights and protections,” says Thomas E. Perez, the U.S. secretary of labor.

“The DOL has engaged in quite a bit of outreach over the best few years but its focus in many respects has been on educating the workers, educating the employees and providing them assistance in filing complaints,” says Buck Consultants at Xerox’s Vary. But, “you get a sense where the DOL’s head is, and that’s not that different from many government agencies. They are, after all, in the enforcement business.”

Because each state regulation may vary, with some state laws being more strict than those at the federal level, Phelps says the independent contractor classifications, and misclassifications in general, are being labeled as “an unfair business practice.”

“All of those costs that an employer would have satisfy within the W-2, they don’t have to satisfy as a 1099,” Phelps explains.

But all employers want to know whether there will be some reprieve or clarification. According to Doyle, the DOL’s broad strokes of intervention, essentially audit programs and education programs, may help some uninformed organizations. Meanwhile, Vary adds that compliance audit of pay practices and time sheets can help employers skirt some of the liability going forward.

Because misclassifications are neither a function of HR departments or upper management, it’s a puzzle that has not been solved and will likely not be for a while, Phelps says.

“I don’t see anything coming down in terms of regulation that’s going to make this simpler,” says Phelps, who has spent more than 30 years in the human capital management industry. “All we’re seeing is greater enforcement.”