Two ominous signs from the Department of Labor (DOL) recently – the news that the DOL hired 100 new auditors for independent contractor review and audit procedures, and their conclusion that “Most workers are employees.”  The DOL released new “interpretive” guidelines that significantly tighten the definition of an independent contractor, making the use of independent contractors within the workforce more risky for San Diego employers.

This is all part of a new joint campaign between the IRS and the DOL entitled the “Misclassification Initiative.”  The initiative promises a lot more audits, and tighter evaluation and monitoring of employers who utilize independent contractors.  San Diego employers are reacting with appropriate concern.  It is never good news for an employer that the IRS and the DOL are working jointly to increase audits upon companies that hire independent contractors.

The benefits of an independent contractor versus an employee are obvious: relatively same work output for less payout (reduced taxes, benefits).  The risk a San Diego employer faces is the reclassification of employees by the IRS or DOL resulting in a substantial financial impact for misclassification including back wages, taxes, and benefit payments.  The IRS is applying new “economic reality” standards based upon a landmark Supreme Court case that concludes the economic relationship between the hiring company and worker is more important than issues of control.  The IRS and DOL also apply specific “Darden Factors” that evaluate the scope of the relationship between the parties including the duration of the work relationship, provision of tools and technology, the difficulty of the work and specialized knowledge or skill required, control over profit and loss for the independent contractor, and even more basic factors such as whether or not the independent contractor has their own business entity.

These are complex issues, and the economic impacts at risk are substantial.  In some cases, they could break the back of a company threatening the survival of a business with significant independent contractor ratios.  The Department of Labor hired 100 new auditors for a reason.  The DOL is partnering with the IRS for a reason.  Protect yourself.  The experienced wage and hour attorneys at the Watkins Firm provide guidance to our business clients, and help them to evaluate and carefully comply with independent contractor labor laws.  We invite you to contact us for a free and substantive consultation at 858-535-1511.