The President's recent budget proposal for the 2011 fiscal year requests $117 million for the Department of Labor (DOL), with $25 million being specifically set aside to assist in the DOL's fight against employee misclassification. The $25 million in funding will be used to hire 100 new enforcement personnel in connection with a new "Misclassification Initiative." This initiative will be a joint effort between the DOL and Treasury Department, focused on ensuring that employees are being properly classified in accordance with the Fair Labor Standards Act ("FLSA") and other applicable federal laws. Through increased—and increasingly aggressive—investigations and enforcement, the initiative seeks to recoup at least $7 billion from employers over the next 10 years, in revenue that would otherwise be lost due to misclassification.

Through its Joint Enforcement Task Force of Employee Misclassification (Task Force), which was created in 2007, New York state has already implemented a similar multi-agency initiative to address the problem of employee misclassification. Since its inception, the Task Force has identified over 30,000 examples of employee misclassification through an aggressive enforcement effort. The Task Force utilizes joint enforcement sweeps, coordinated investigations, referrals of audit results, and improved data-sharing to cut down on the prevalence of employee misclassification.

Employee misclassification, in brief, typically occurs when an employer improperly classifies a worker as an independent contractor instead of as an employee. The issues that arise with this form of misclassification are two-fold. First, by being misclassified as independent contractors, employees may be excluded from coverage under various protections and benefits specifically available to workers classified as employees, including minimum hourly wage and overtime, unemployment insurance, workers' compensation, and access to employer-provided health insurance and pension plans. Second, employers who misclassify employees as independent contractors commonly fail to withhold Social Security, Medicare, and income taxes on wages paid, while avoiding various state and federal taxes that fund various programs, including unemployment insurance and workers' compensation.

Misclassification also regularly occurs in the context of employers incorrectly classifying employees as "exempt" under federal and state wage and hour provisions. Employers commonly misclassify employees pursuant to the "white collar" exemptions of the FLSA, which are applicable to executives, professionals, and administrators. Misclassifications in this context lead to employees' wages going unpaid or under-paid, while employers avoid compliance with applicable minimum wage and overtime regulations.

In light of the President's proposals, the continued efforts of the New York Task Force, and growing federal and state budget deficits, employers must place increased scrutiny on any decision to classify a worker as an independent contractor or as exempt from minimum wage and overtime to avoid significant potential penalties. In determining whether or not a worker is an employee or an independent contractor, employers in New York should apply the "common law test," which focuses on the degree of supervision, direction, and control the employer has over how the work is performed. Additionally, it would be wise for employers to compare all employee job descriptions with the actual work performed by the individuals holding them to determine whether current workers are classified correctly either as employees/independent contractors or exempt/non-exempt employees. 

The recent increase in investigation and enforcement offers a reminder that the misclassification of workers can result in significant consequences for employers, both in the administrative and legal inconvenience accompanying an investigation and a finding of misclassification and in the ultimate monetary penalty imposed. Federal and state investigations may involve comprehensive audits and all too often ultimately result in great expenses to employers in the form of payment of back wages, assessments for unpaid workers' compensation and unemployment insurance taxes, liquidated damages, attorney's fees, and, increasingly, private suits brought by employees to recover unpaid or underpaid wages.  With both federal and state initiatives focused on curtailing employee misclassification, employers should be proactive about re-evaluating their current employee classifications to avoid potential liability.

For more information on understanding the impact of this recent increase in wage and hour investigation and enforcement, or for assistance in achieving legal compliance in employee classification, please contact Daniel J. Moore, the Labor and Employment Law Practice Group leader at (585) 419-8626 / dmoore@harrisbeach.com, or the attorney with whom you usually work

This Legal Alert provides a brief analysis or commentary on matters related to labor and employment law, and does not purport to be a substitute for advice of counsel on specific matters. The application of any federal and/or state wage and hour laws, and any implementing regulations, will depend on the facts presented in each case. As such, counsel should be sought for specific situations.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse and Yonkers, White Plains, as well as Newark, New Jersey.