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Regulatory Developments

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On Sept. 19, the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) announced a new joint effort to “end the business practice of misclassifying employees” as independent contractors or subcontractors in order to reduce labor costs.

"We're standing united to end the practice of misclassifying employees," said DOL Secretary Hilda Solis at an event marking the agreement between her agency and the IRS. "We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike."

The collaboration also includes labor commissioners from 11 states: Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah and Washington.

In concert with this joint agency effort, IRS also announced on Sept. 21 the Voluntary Classification Settlement Program (VCSP) to allow employers to voluntarily reclassify workers as employees for federal tax purposes. Through the VCSP, employers will be able to pay a reduced tax liability for the misclassification of employees as opposed to current law penalties of back taxes and interest. Employers will need to meet certain other requirements to be eligible for the program.

It’s likely that HR professionals will now see stepped-up enforcement of employee classification. While recognizing the importance of proper classification, SHRM has argued that the issues are not always clear-cut. Within federal statutes and agencies, there are conflicting definitions of “employee” and “independent contractor.” 

For further information, please access SHRM’s 2007 congressional testimony on the challenges HR professionals face in classifying employees correctly.

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