On Thursday, the Senate Committee on Health, Education, Labor and Pensions (HELP) held a hearing – Leveling the Playing Field: Protecting Workers and Businesses affected by Misclassification – to address issues relating to the misclassification of employees as independent contractors. During the hearing, HELP Committee Chairman Tom Harkin (D-IA) quoted a study indicating that nearly 10.3 million workers in this country are classified as independent contractors, and that as many as 30% of businesses have misclassified their workers as independent contractors. Consequently, both Congress and the Department of Labor (DOL) have shown a great deal of interest in this area in recent months.

In April, a bill was introduced in both the House and Senate that specifically targets misclassification. The Employee Misclassification Prevention Act (H.R. 5107, S. 3254), introduced by Rep. Lynn Woolsey (D-CA) and Sens. Sherrod Brown (D-OH) and Tom Harkin (D-IA), would, among other things, amend the Fair Labor Standards Act (FLSA) to require employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification. Other bills introduced this legislative term that address worker misclassification include the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) introduced by Sen. John Kerry (D-MA), and a similar bill (H.R. 3408) with the same name introduced by Rep. Jim McDermott (D-WA). Both bills would revise section 530 of the Revenue Act of 1978, known as the “safe harbor” provision, which currently allows employers to designate certain workers as independent contractors for federal employment tax purposes.

On the regulatory side, the DOL’s 2011 budget contains a number of provisions for programs to address this problem. For example, the DOL recently launched a public awareness campaign targeting worker misclassification. As mentioned by Sen. Harkin, in January the DOL hired more investigators to pursue misclassification, and the Internal Revenue Service “is working on a comprehensive nationwide employment tax audit program aimed, in part, to catch companies that improperly fail to withhold taxes and pay Social Security and Medicare premiums on the wages of workers misclassified as independent contractors.”

In his testimony, Deputy Labor Secretary Seth Harris highlighted a number of the DOL’s other regulatory activities aimed at reducing worker misclassification, such as the “Plan/Prevent/Protect” compliance strategy, which will require employers to (1) create a “plan” for identifying and remediating risks of employment law violations and make the plans available to workers so they can participate in their creation, fully understand them, and help to monitor their implementation; (2) thoroughly and completely implement the plan in a manner that “prevents” legal violations; and (3) ensure that the plan’s objectives are met on a regular basis so that it actually “protects” workers from violations of their workplace rights. Harris also noted that the DOL’s Wage and Hour Division (WHD) is considering a rule that would require an employer to disclose the analysis it used to determine that a worker is an independent contractor to the affected individual, and keep a record of the analysis for review should a Wage and Hour investigator seek this information. Harris concluded his testimony by stating that the DOL “strongly endorses” the Employee Misclassification Prevention Act, and that this legislation “is needed to provide DOL with additional tools that the Department cannot use without action by the Congress.”

Other panelists also spoke in favor of the DOL’s enforcement efforts and the misclassification legislation. For instance, Frank Battaglino, a business owner speaking on behalf of the Sheet Metal and Air Conditioning Contractors’ National Association as well as the Campaign for Quality Construction, testified that companies that regularly misclassify employees as independent contractors can offer bids for projects that are 20 to 30% below those offered by businesses that do not use this practice. He urged “responsible employers and government alike” to “partner for this cause.”

Not every panelist, however, approved of the bill. Gary Uber, co-founder of Family Private Care, Inc., a licensed nurse registry, testified on behalf of Private Care Association, Inc., a member of the Coalition to Preserve Independent Contractor Status. Uber expressed concern that “the increasingly intensified government efforts to identify misclassified workers and punish the firms that do business with them can result in firms . . . deciding that the regulatory risks of doing business with independent contractors have become intolerable.” Additionally, Uber claimed that the legislation’s proposed recordkeeping requirements are unworkable for a caregiver registry; that the proposed notice requirement would adversely affect the working relationship between an independent contractor and the contractor’s clients; that the proposed anti-retaliation provision could reward unethical conduct; and that the legislation itself is “premised on the false assumption that the decision whether an individual will work as an employee or independent contractor is made by a firm doing business with the individual, rather than by the individual.”

A complete list of the panelists and copies of their testimony can be found here.