Washington DC- Today, U.S. Senators Bob Casey (D-PA) and Al Franken (D-MN) introduced legislation to address payroll fraud, which occurs when an employer misclassifies a worker as an independent contractor rather than employee. When a worker is wrongly classified as an independent contractor, there is a denial of basic protections like fair labor standards, health and safety protections. Casey and Franken’s legislation would crack down on misclassification practices and prohibit companies from using worker misclassification to avoid taxes.
“Payroll fraud hurts wages, costs workers basic protections and harms economic growth,” Senator Casey said. “We owe workers a fair shot at good jobs where they can receive basic workplace protections. Too many workers are classified as independent contractors when it’s clear that they are employees. This legislation is a commonsense fix that will ensure workers in Pennsylvania and throughout the nation are treated fairly.”
“When employees are misclassified, they lose out on important workplace protections and fair labor standards,” Senator Franken said. “These workers often don’t qualify for things like minimum wage, overtime pay, workers’ compensation insurance, and retirement benefits. Our legislation would crack down on payroll fraud, a practice that is hurting our workers, costing taxpayers, and putting businesses that play by the rules at a competitive disadvantage.”
“Misclassification cheats hard-working Americans out of federally guaranteed labor rights and benefits, such as overtime pay, minimum wage, and family and medical leave. Misclassification cheats law-abiding businesses out of a level playing field. Misclassification cheats the American economy out of billions in tax revenues, putting a strain on already stressed programs like Medicare and Social Security,” said Rep. Frederica Wilson (FL-24). “The Payroll Fraud Prevention Act of 2015 will strengthen the Fair Labor Standards Act to ensure more American workers, businesses, and taxpayers receive the fair treatment they deserve.”
Employee misclassification occurs when an employer improperly classifies a worker as an independent contractor instead of an employee. While laws vary, in general a person is considered an employee if he or she is subject to another’s right to control the manner and means of performing the work. In contrast, independent contractors are individuals who obtain customers on their own to provide services and who may have other employees working for them and who are not subject to control over the manner by which they perform services.
The vast majority of employers that follow the rules are placed at a significant disadvantage when competing against a business that is breaking the law and not paying employment taxes. Lower costs for those breaking the rules means less business for those who do. This also places downward pressure on wages paid to workers. Taxpayers are also shortchanged through loss of revenue by federal and state governments.
A June 2013 Treasury Inspector General for Tax Administration (TIGTA) report stated: “The misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap.” A 2009 TIGTA report on misclassification said that the lost revenue would be “markedly higher than $1.6 billion.”
Today, about 50 million workers – one-third of the workforce – are classified as independent contractors, freelancers, or temporary workers. This number is predicted to grow to 60 million workers – 40 percent of the workforce – by 2020. These workers do not receive benefits and safeguards such as unemployment insurance, workers’ compensation, and retirement benefits. As the workplace and our definition of workers evolve away from traditional employment models, we must ensure that we take appropriate steps to protect the new workforce, which is key to preserving a strong middle-class.
In November 2013, Senator Casey chaired an Employment and Workplace Safety Subcommittee hearing entitled: Payroll Fraud: Targeting Bad Actors Hurting Workers and Businesses.
THE PAYROLL FRAUD PREVENTION ACT
The Payroll Fraud Prevention Act would protect workers from being misclassified as independent contractors, thereby ensuring access to safeguards like fair labor standards, health and safety protections, and unemployment and workers’ compensation benefits. The Act would also prohibit employers from using misclassification to avoid paying their fair share of taxes.
Proper Classification and Notice to Employees
- Requires that records kept pursuant to the Fair Labor Standards Act (FLSA) include an accurate classification of the worker as either an employee or a non-employee.
- Requires that all workers be accurately classified as employees or non-employees. They must be provided with written notice of their classification and directed to DOL employee rights resources.
- Creates a rebuttable presumption that, when an employer fails to provide a written notice of classification (with requisite reference to DOL website and/or resources) to any employee or non-employee, the worker will be considered an employee.
Prohibitions and Penalties
- Makes it a violation of the Fair Labor Standards Act to discharge or discriminate against a worker because he or she has opposed any practice concerning his or her classification.
- Makes it a violation of the Fair Labor Standards Act to misclassify an employee.
- Extends a private right of action to misclassified employees to recover lost wages and, when an employer also violates minimum wage or maximum hour standards, double liquidated damages.
- Subjects employers to a civil penalty up to $1,100 for misclassification violations or violations of minimum wage or overtime standards and up to $5,000 when such violations are repeated or willful.
- Directs DOL to establish a website summarizing the rights of workers under this Act.
State Directives – Makes unemployment compensation grants contingent on a state
- having auditing and investigative procedures in place to identify employers that exclude employees from unemployment compensation;
- filing quarterly reports describing the findings of such procedures; and
- establishing administrative penalties for misclassifying employees or paying unreported compensation. DOL is also required to audit states’ performance in conducting unemployment compensation tax audits.
- Directs all divisions of DOL to report information obtained concerning misclassification to DOL’s Wage and Hour Division, which may report such information to the IRS, as appropriate.
- Directs the DOL’s Wage and Hour Division to conduct audits of industries with frequent incidence of misclassification.