The U.S. Congress is currently considering legislation that would impose significant penalties on employers who improperly classify employees as "independent contractors" to avoid paying for benefits. 

The Employee Misclassification Prevention Act (S. 3648) was introduced in the Senate on September 29, and is sponsored by Senators Edward M. Kennedy (D-Mass.), Barack Obama (D-Ill.) and John Kerry (D-Mass.).   Features of the bill include:

  • Amending the Fair Labor Standards Act (FLSA) to prohibit the misclassification of an employee as an independent contractor, providing for liquidated damages and civil penalties of up to $10,000. 
  • Requiring employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification.
  • Requiring state unemployment insurance agencies to audit employers who misclassify employees.
  • Allowing the Department of Labor and the Internal Revenue Service to share information on cases where employers misclassify workers. 
  • Requiring the Department of Labor to perform targeted audits focusing on employers in industries that frequently misclassify employees.
  • Directing the Department of Labor to establish a Web site that summarizes the rights of employees under the FLSA and other federal laws.

A companion bill, H.R. 6111, was introduced in the House in May.  Don’t expect this bill to become law as long as President Bush is in the White House, but with a likely democratic majority in Congress and a new President, passage of the bill appears very likely.  Employers should be aware of the existing risks of incorrectly classifying employees as "independent contractors," including claims for unpaid overtime, minimum wage claims, benefits claims, workers’ compensation liability, and tax penalties.