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Independent Contractors: Beware Worker Misclassification Traps

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By Stephanie Rabiner, Esq. on May 03, 2011 6:46 AM

Last month it was announced that Levi Strauss & Co has agreed to pay $1 million in back wages to about 600 employees after a government investigation found that the company had misclassified employees, deeming them exempt from overtime.

The settlement is one of many in a recent deluge of employee misclassification lawsuits and investigations under the Fair Labor Standards Act, and with new legislation on the way, it's only going to continue.

In the last month, numerous states have considered or passed legislation aimed at worker misclassification. Moreover, in the last year, the IRS and Department of Labor have begun dedicating resources to employee audits and investigations.

Additionally, the Payroll Fraud Prevention Act (S. 770) is currently in Senate committee. The bill seeks to amend the Fair Labor Standards Act to clarify employee classification, mandate investigation and reporting by the Department of Labor, and to establish administrative penalties of up to $5000 per worker.

Even without S. 770, misclassification can already lead to FLSA penalties, back wages for 2 to 3 years, state penalties, back taxes, and an administrative nightmare trying to handle pensions and benefits.

With renewed attention on the issue of misclassification and the attractiveness of hiring independent contractors during trying economic times, it might be a good idea to take the time to reacquaint yourself and your management team with the rules governing independent contractors.

The fact is that, in hiring independent contractors, companies are opening themselves up to incredible risk, and staying on top of the rules that govern the distinction between employees and non-employees is the only effective prevention.

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