DOL Takes Aim at Independent Contractor Misclassification

By Allen Smith Feb 3, 2015

Employers need to make sure workers aren’t being misclassified as independent contractors in the wake of vigorous U.S. Department of Labor (DOL) enforcement, according to Michael Moschel, an attorney with Bass, Berry & Sims in Nashville, Tenn.

That enforcement was illustrated in the following recent DOL announcements:

  • Jan. 29, 2015—Specialty Painting & Wall Covering Inc. and M&S Enterprise in Texas paid more than $108,000 in overtime back wages after a DOL investigation found that some workers were misclassified as independent contractors.
  • May 19, 2014—Paul Johnson Drywall Inc. in Prescott, Ariz., agreed to pay $600,000 in back wages, damages and penalties following the misclassification of workers as independent contractors.
  • May 9, 2013—The DOL recovered more than $1 million in back wages and damages for 196 workers of a Kentucky-based cable installer, Bowlin Group LLC and Bowlin Services LLC, who were misclassified as independent contractors.
  • Feb. 12, 2013—A federal judge with the U.S. District Court for the Eastern District of Pennsylvania ordered kgb USA Inc., the world’s largest independent provider of directory assistance, headquartered in Bethlehem, Pa., to pay $1.3 million in minimum-wage compensation to 14,568 workers following the company’s misclassification of the employees as independent contractors.
  • April 26, 2012—Hawkins Tree and Landscaping in Minnesota entered a consent judgment of back pay and liquidated damages for $478,000 to 57 current and former laborers, drivers, crew leaders and foremen who were misclassified as independent contractors and were not paid overtime. The company and its owners also agreed to pay $22,000 in civil penalties.

Warning Signs

Moschel said there are a number of signs that an individual has been misclassified as an independent contractor, such as the following:

  • The individual is compensated any way other than on a per-project basis. Payment by the hour is particularly suspect.
  • The employer grants the individual paid vacation or sick leave.
  • The employer reimburses business expenses incurred by the individual.
  • The type of work performed by the individual is typically paid by the employer on a W-2 basis.
  • A noncompete agreement is in place; such agreements are not used for independent contractors.

Moschel added that the longer-term the relationship is, the more likely it is an employer-employee relationship.


States agencies continue to enter into memorandums of understanding (MOU) with the DOL to identify misclassification, Moschel noted. The MOUs facilitate information sharing among the DOL and state agencies to identify all types of misclassification of independent contractors and step up wage and hour enforcement among private employers. For example, if a state agency finds that an employer is misclassifying workers as independent contractors for purposes of evading state unemployment taxes, that information will be shared with the DOL, which then can investigate and determine whether the employer also has misclassified workers to evade federal wage and hour laws.

Most recently, the Wisconsin Department of Workforce Development signed an MOU with the DOL on Jan. 20, 2015. The Florida Department of Revenue also signed an MOU with the DOL on Jan. 13, 2015. In addition, the DOL has MOUs with state agencies in Alabama, California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Utah and Washington.

Misclassification is a “multifaceted problem,” Moschel said, observing that it results in employers not withholding the workers’ federal taxes, not filling out I-9s for immigration purposes, not paying workers’ compensation and failing to pay overtime. It also results in individuals not being eligible to participate in Employee Retirement Income Security Act (ERISA) benefits plans.

Since 2008, the DOL has hired 2,000 investigators, doubling its total number, Moschel remarked. Now investigators look at whether individuals have been misclassified as independent contractors “as a routine matter,” he said.

Review and Reclassify

Employers should analyze at the outset whether an individual is an independent contractor and then re-evaluate the relationship annually in the case of long-term contractors, Moschel recommended.

If the employer determines that individuals are misclassified as independent contractors, it can reclassify them as employees and make them whole with back pay. More typically, they are reclassified without back pay, he remarked.

That said, some employers will self-report the misclassification to state labor departments and the DOL, particularly if the employers are federal contractors. Contractors need to comply with federal and state wage and hour laws, Moschel explained, so “They could lose the contract if they do not comply.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.


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