The employee/independent contractor question is often a thorny issue for employers, but in the next year, it could be an even bigger problem.  According to an article in Crain’s Cleveland Business, “[o]ver the past two years, the Wage and Hour Division of the U.S. Department of Labor has hired more than 350 investigators to uncover employment violations, including misclassification, and President Obama has requested $25 million in the fiscal 2011 budget to target the issue further.”  In addition to the government crackdown, class action lawsuits brought against employers accused of misclassifying employees have increased significantly in recent years.

It is much easier to solve these problems with an internal audit than to wait for an official audit by the Department of Labor (DOL).  DOL audits can be devastating to a small business.  The DOL audit process, and appeals if pursued, are long and expensive, even if companies end up not owing back pay, penalties and interest.  While the DOL seems to be looking at all businesses, sectors that are drawing particular scrutiny include trucking, construction, manufacturing, information technology, and home health care. 

Federal and state agencies have varying reasons to investigate worker misclassification.  According to the Cleveland Business article, between Oct. 1, 2009, and Sept. 30, 2010, the federal Wage and Hour Division collected $2.2 million in back wages for 5,261 workers who were misclassified in some way. Of that amount, $256,730 was collected for 415 workers in the Midwest region, which includes 10 states.  Note that these numbers do not include penalties and interest., nor do they include amounts recovered through private class actions.

The end of the year is normally a time for contract renewals and is a good time for employers to look at the classification issue for independent contractors.  But this is not a black & white area and is, sometimes, a topic of much confusion.  The cost of calling in professional help with these internal audits is more than made up for when compared to the expense of a DOL audit.