Worker Classification

Worker Misclassification

There is a nationwide crisis affecting the Construction Industry and many other industries. This crisis is the misclassification of “Employees” as “Independent Contractors”.  Many Contractors, especially sub-contractors, use this type of misclassification to secure construction projects by not including into their bids the payroll taxes, unemployment taxes, other state taxes and workers compensation premiums. There is another reason for contractors using this method of misclassification and that is to avoid using the I-9 Form or E-Verify program to establish each worker’s identity and employability in this country. Contractors that play by the rules have an unfair advantage in securing contracts and this practice has to be stopped.

Workers classified as Independent Contractors also lose out by not having the protections that Employees have. Misclassified workers do not have the protection of workers compensation, unemployment benefits or Social Security or Medicare benefits on their income. This leaves the misclassified workers responsible for all taxes on the income earned from being classified as independent contractors.  Although the misclassified workers are sent a Form 1099 Miscellaneous by the Contractor, many of these 1099’s never get reported or submitted on tax returns. These misclassified workers also do not have any worker protections under the National Labor Relations Act.  The Department of Labor has stepped up their investigations of misclassified workers as independent contractors with violations against Employers of failing to maintain accurate records under the recordkeeping requirements covered by the Fair Labor Standards Act.

Employers or workers may use the IRS Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) in determining independent contractor/employee status. Workers that don’t want their identity made known should not use this form. The IRS will require the employer to be notified and their name may be disclosed while investigating.  If the worker is determined by the IRS not to be properly classified as an employee, then the contractor may be required to pay all the Employer taxes and penalties and the employees share of taxes also.

There are many studies that show the revenue loss and impact to the federal government and to the states. Losses are in the hundreds of millions of dollars in taxes and workers compensation premiums. Congress has held many hearings over the last few years in relation to this issue. Many states have enacted or considering the implementation of laws that includes severe penalties and including criminal charges for intentionally misclassifying employees as independent contractors.

The Texas Legislature passed House Bill 2015 in 2013 that addressed misclassification of employees as independent contractors on publicly funded projects. Although the penalty is only $200 per worker, it is the first bill addressing misclassification in Texas signed by former Governor Rick Perry. The new law became effective on January 1, 2014.

The Texas House Business & Committee held interim hearings in 2014 to hear testimony on this issue of misclassification. They have recommended to the Speaker that a study be done on all industries affected by misclassification and the lost revenues to the state with a report being issued to the next Legislature in 2017.

There have been many bills filed in Congress to fix the IRS Code Section 530 Safe Harbor provision that would address the abuse of workers being misclassified as independent contractors.  No legislation has been passed in Congress to fix this problem.

In 2011, the DOL under Secretary of Labor Hilda Solis launched a Misclassification Initiative Memorandum of Understanding with the IRS. This MOU allowed State Governments to sign on and share information with the DOL and IRS that goes after these unscrupulous companies. Currently, 20 states have signed on to the MOU. They are Alabama, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Utah, Washington, Wisconsin and Wyoming.

Click here to review and learn more from the US Department of Labor Worker Misclassification Resources Page.

Click here to read the 2018 report from the Treasury Inspector General for Tax Administation Office for Inspection and Evaluations. The report recommends Additional Actions Are Needed to Make the Worker Misclassification with the Department of Labor a Success.

E-Verify and I-9 Processes

Click here to learn more about E-Verify Temporary Policies related to COVID-19.

Click Here to view the USCIS Pilot Program to self-check employment status using E-Verify now available in all 50 states and Washington, DC
USCIS Issues Final Rule on Employment Eligibility Verification Form
Final Rule Adopts Interim Rule Improving Integrity of Form I-9 Process & Links to Press Release, M-274 Employer Handbook and I-9 Form & Instructions.
Click Here to view the Press release :

Click Here for the current M-274 Employer Handbook with Instructions to Complete I-9 Forms as updated April 27 2020.

Click Here for the current I-9 Form & Instructions. The forms may be filled out online and printed or download and print the form..