United States: Preview Into The 2013 Version Of The Payroll Fraud Prevention Act: Yet Another Congressional Effort To Crack Down On Independent Contractor Misclassification

Last Updated: November 21 2013
Article by Richard J. Reibstein, Lisa B. Petkun and Andrew J. Rudolph

Yesterday, November 12, 2013, Senator Bob Casey (D-PA) convened a hearing of the Senate Subcommittee on Employment and Workplace Safety. Senator Casey mentioned at the outset of the hearing that "independent contractors serve a valuable role in our economy" and that there is no intent on his part or on the part of any senator advocating new legislation to use an "overbroad brush to point fingers at companies that are following the law or on law-abiding independent contractors."  Rather, Senator Casey remarked, he was focusing on legislation to curtail the use of independent contractors (ICs) by those companies that do so by "breaking the rules" and not those businesses that are "following the rules."

An Effort to Distinguish Between Intentional and Unintentional Misclassification.

The hearing, entitled "Payroll Fraud: Targeting Bad Actors Hurting Workers and Businesses," focused on the need for Congress to pass new legislation outlawing what Senator Casey called the "intentional misclassification" of employees as ICs – a practice that he labeled as "payroll fraud."  Senator Casey then informed the hearing that he and Senators Tom Harkin (D-IA) and Sherrod Brown (D-OH) would be co-sponsoring the Payroll Fraud Prevention Act of 2013, which he said would make IC misclassification a new federal offense, would require record-keeping on the part of businesses and require disclosure to workers of their status as either employees or ICs, and would make compliance subject to government audit.  Senator Casey referred to such provisions as "prohibitions and sanctions."

The ranking Republican member of the Subcommittee, Senator Johnny Isakson (R-Georgia), complimented Senator Casey for taking note of  "the difference between intentional and unintentional misclassification." He commented on his own prior business experience before becoming a senator, where his business, which followed the rules for the use of ICs, provided work for 800 ICs and 200 employees. He urged Senator Casey "not to throw out people playing by the rules."

Anticipated Comparison with Prior IC Misclassification Bills. 

The Payroll Fraud Prevention Act of 2013 was reportedly introduced later in the day yesterday, but its text has not yet been released. This bill has the same title as the Payroll Fraud Prevention Act of 2011 (S.770), which was introduced on April 8, 2011 by Senators Brown and Harkin along with Senator Richard Blumenthal (D-CT).  The 2011 bill would have expanded the federal Fair Labor Standards Act (which currently addresses minimum wage, overtime, and child labor laws) to cover misclassification of employees as ICs.  The 2011 bill would also have created a new definition of workers called "non-employees," impose upon businesses the obligation to provide a classification notice for both "non-employees" and "employees," would have made the misclassification of "employees" as "non-employees" a new labor law offense, and would have exposed businesses to fines of up to $5,000 per worker for each violation of the law.  These provisions may re-appear in the 2013 version of the bill.

Senator Casey noted that the new bill would, in addition, impose recordkeeping requirements on businesses, a feature that the 2011 version of the bill did not include.  This type of requirement is reminiscent of the 2011 and 2010 versions of the Employee Misclassification Prevention Act (EMPA), both of which would have added new recordkeeping obligations on all businesses – not just on those that used ICs or other categories of non-employee workers.

The comments by Senators Casey and Isakson found common ground on the distinction between intentional and unintentional misclassification. None of the prior IC misclassification bills in Congress sought to make that important distinction, although the 2011 version of the bill would have imposed treble damages on companies that engaged in "willful" misclassification.

Another Tax Bill Aimed at Section 530's "Safe Harbor" Apparently is Also on the Way.

In his comments at the hearing, Senator Casey made reference to another IC bill that is likely to be introduced soon – a tax bill to be introduced in the Senate by Senator Brown. In 2012, Senator Brown was one of the co-sponsors of the Fair Playing Field Act of 2012.  That bill sought to eliminate the so-called "safe harbor" in the Section 530 of the Revenue Act of 1978, which has been relied upon by some businesses that for years may have consistently misclassified employees as independent contractors.


1.  Will this type of bill pass Congress? 

This upcoming bill will be the ninth IC misclassification law introduced in Congress since mid-2007.  Bipartisan support for most key Congressional bills has been elusive the past few years, and it is unlikely that any IC misclassification bill that includes broad, new record-keeping and disclosure requirements would enjoy passage by both houses of Congress under the current political composition of Congress. While Senator Casey essentially promised that the bill would distinguish between intentional and unintentional misclassification, as is the case with California's 2011 law, which only prohibits willful misclassification, that distinction may not be nearly enough to garner support by the current Republican majority in the House of Representatives.

2.  What Should Businesses Do to Minimize IC Misclassification Exposure? 

Most businesses that use ICs have been alert to the fact that state legislatures have been very active in passing laws cracking down on IC misclassification, even though Congress has been unable to legislate in this area. About half of the states have passed laws since July 2007 curtailing the use of ICs, increasing penalties for IC misclassification, creating IC misclassification task forces, and/or requiring state agencies to share information with other state agencies about companies that have been found to have misclassified employees as ICs.  State workplace agencies have been increasingly active in pursuing companies that are believed to be misclassifying employees as independent contractors, including those regulating unemployment compensation, workers' compensation, and payment of minimum wage and overtime.

Despite the absence of federal legislation, the U.S. Department of Labor and the IRS have been increasingly cracking down on businesses that misclassify ICs.  And plaintiffs' class action lawyers have, for the past few years, targeted companies that have not "followed the rules" regarding the use of ICs.

Even companies that intend to comply with the applicable federal and state laws have been found to have misclassified employees as ICs.  Why? Because they have unwittingly failed to structure, document, and implement their IC relationships consistent with such laws. In this legal environment, many companies that use ICs or conduct business using an IC-business model have sought to minimize their exposure to IC misclassification liability, which for many companies can be a seven-figure number or higher – depending on the number of ICs in use as well as other variables. Businesses have used IC Diagnostics", a proprietary process to evaluate their level of IC compliance, assess their compliance alternatives, and guide the restructuring, re-documentation, and re-implementation of IC relationships to enhance IC compliance and minimize exposure.

When the Payroll Fraud Prevention Act is available to the public, we will report on it here in this legal blog.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Lisa B. Petkun
Andrew J. Rudolph
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