Employee Misclassification: Improved Outreach Could Help Ensure  
Proper Worker Classification (08-MAY-07, GAO-07-859T).		 
                                                                 
Some workers do not receive worker protections to which they are 
entitled because employers misclassify them as independent	 
contractors when they should be classified as employees. Key	 
worker protections include minimum hourly wage and overtime pay  
and access to unemployment insurance. The Department of Labor	 
(DOL) enforces several labor laws to protect workers, including  
the Fair Labor Standards Act (FLSA). Misclassification can also  
have a negative impact on tax collection for Social Security,	 
unemployment insurance, and other programs. This testimony draws 
upon a previous GAO report and focuses specifically on (1) the	 
number and characteristics of independent contractors, (2) the	 
workforce protections and benefits provided to employees that	 
typically are not available to independent contractors, and (3)  
the actions that DOL takes to detect and address employee	 
misclassification.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-859T					        
    ACCNO:   A69285						        
  TITLE:     Employee Misclassification: Improved Outreach Could Help 
Ensure Proper Worker Classification				 
     DATE:   05/08/2007 
  SUBJECT:   Employee benefit plans				 
	     Employee medical benefits				 
	     Employee rights					 
	     Employees						 
	     Independent contractors				 
	     Labor law						 
	     Labor statistics					 
	     Minimum wage rates 				 
	     Unemployment insurance				 
	     Workers compensation				 
	     Overtime compensation				 

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GAO-07-859T

   

     * [1]Background
     * [2]Number and Characteristics of Independent Contractors
     * [3]Misclassification of Employees Can Have Negative Outcomes fo

          * [4]There Is Neither a Single or Simple Test Used to Determine w
          * [5]Misclassified Employees May Be Excluded from Coverage under
          * [6]Misclassified Employees May Not Have Access to Some Employer
          * [7]Employee Misclassification Can Affect Administration of Gove

     * [8]DOL Detects and Addresses Employee Misclassification Through

          * [9]Investigators Determine Workers' Employment Relationship
          * [10]Employee Misclassification, though Not an FLSA Violation, Ma
          * [11]DOL's Outreach Efforts Provide Some Information on Employee
          * [12]DOL Offices We Studied Vary in How Often They Forward Miscla

     * [13]Conclusions and Recommendations for Executive Action
     * [14]GAO Contacts and Staff Acknowledgments
     * [15]GAO's Mission
     * [16]Obtaining Copies of GAO Reports and Testimony

          * [17]Order by Mail or Phone

     * [18]To Report Fraud, Waste, and Abuse in Federal Programs
     * [19]Congressional Relations
     * [20]Public Affairs

Testimony before the Subcommittee on Income Security and Family Support
and Subcommittee on Select Revenue Measures, Committee on Ways and Means,
House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 9:30 a.m. EDT
Tuesday, May 8, 2007

EMPLOYEE MISCLASSIFICATION

Improved Outreach Could Help Ensure Proper Worker Classification

Statement of Sigurd R. Nilsen, Director
Education, Workforce, and Income Security

GAO-07-859T

Mr. Chairmen and Members of the Subcommittees:

Thank you for inviting me here today to discuss the misclassification of
employees as independent contractors. Some workers do not receive worker
protections to which they are entitled because employers misclassify them
as independent contractors when they should be classified as employees.
Key worker benefits and protections include the guarantee of workers'
rights to safe and healthful working conditions, a minimum hourly wage and
overtime pay, freedom from employment discrimination, and access to
unemployment insurance. In its last comprehensive misclassification
estimate, the Internal Revenue Service (IRS) estimated that 15 percent of
employers misclassified 3.4 million workers as independent contractors in
1984, resulting in an estimated tax loss of $1.6 billion (or $2.72 billion
in inflation-adjusted 2006 dollars^1) in Social Security tax, unemployment
tax, and income tax.

The Department of Labor (DOL) enforces a wide range of labor laws that
provide protections to workers, including the Fair Labor Standards Act
(FLSA), which provides minimum wage, overtime pay, and child labor
protections. Other federal and state agencies enforce laws that provide
workers with additional workforce benefits and protections.

The information I am presenting today is based on findings from a July
2006 report, which examined various aspects of the contingent workforce.^2
Today, as requested, I will focus specifically on independent contractors,
one of eight categories of contingent workers included in our report. I
will discuss (1) the number and characteristics of independent
contractors, (2) the workforce protections and benefits provided to
employees that typically are not available to independent contractors, and
(3) the actions that DOL takes to detect and address employee
misclassification. To identify information on the contingent workforce, we
analyzed data from the Bureau of Labor Statistics' (BLS) Current
Population Survey (CPS), which is used to survey people about their work
and workplace benefits, and a CPS supplement developed to collect
information on the contingent workforce; interviewed BLS officials and
other researchers about contingent worker issues; and reviewed key
workforce protection laws to determine coverage of contingent workers. To
obtain information on DOL's efforts to detect and address employee
misclassification, we reviewed DOL documents and interviewed DOL officials
and reviewed literature and interviewed researchers about employee
misclassification issues. We performed our work in accordance with
generally accepted government auditing standards between July 2005 and
June 2006.

^1The $2.72 billion is intended to be an estimate of the magnitude of tax
loss due to misclassification in 2006 dollars--not an updated estimate.
The actual tax loss due to misclassification in 2006 may be higher or
lower based on the tax rates, the level of independent contractors used in
various sectors of the economy, and the types and levels of
misclassification observed in 2006.

^2GAO, Employment Arrangements: Improved Outreach Could Help Ensure Proper
Worker Classification, [21]GAO-06-656 (Washington, D.C.: July 11, 2006).
In this report, we define "contingent work" as work arrangements that are
not long-term, year-round, full-time employment with a single employer.

In summary, the number of independent contractors in the total employed
workforce grew from 6.7 percent in 1995 to 7.4 percent in 2005. In 2005,
there were 10.3 million independent contractors.^3 Independent
contractors, in 2005, had an average age of 46 years, were almost twice as
likely to be male than female, and almost two-thirds had some college or
higher education. Independent contractors were employed in a wide range of
industries (such as professional services and construction) and
occupations (including sales and management). The tests used to determine
whether a worker is an independent contractor or an employee are complex,
subjective, and differ from law to law. Nevertheless, when employees are
misclassified as independent contractors, they may be excluded from
coverage under key laws designed to protect workers and may not have
access to employer-provided health insurance coverage and pension plans.
Moreover, misclassification of employees can affect the administration of
many federal and state programs, such as payment of taxes and payments
into state workers' compensation and unemployment insurance programs.
Finally, DOL detects and addresses misclassification of employees as
independent contractors by investigating complaints, but does not always
forward misclassification cases to other federal and state agencies. DOL
investigators detect and address employee misclassification primarily when
responding to FLSA minimum wage and overtime pay complaints. DOL
procedures require officials to share information with other federal and
state agencies whenever investigators find possible violations of other
laws. However, the district offices GAO contacted vary in how often they
forward misclassification as a possible violation of other laws. As one
form of outreach to workers, DOL has an FLSA workplace poster that
explains the act, but is missing key contact information. GAO recommended
in its July 2006 report that DOL revise the workplace poster to include
additional contact information that would facilitate the reporting of
potential employee misclassification complaints, and evaluate the extent
to which misclassification cases identified through investigations are
referred to the appropriate federal or state agency, and take action to
make improvements as necessary. DOL generally agreed with both
recommendations.

^3Estimates of the size and characteristics of the contingent workforce
are based on CPS sample data and are subject to sampling error. For
example, the 95 percent confidence intervals for percentages of the total
workforce are within +/- 1 percentage point of the estimate itself. For a
full explanation of the methodology that we used and for the magnitude of
sampling error for CPS estimates, see [22]GAO-06-656 .

Background

The term "contingent work" can be defined in many ways to refer to a
variety of nonstandard work arrangements. Broadly defined, "contingent
work" refers to work arrangements that are not long-term, year-round,
full-time employment with a single employer. For example, an employer may
hire workers when there is an immediate and limited demand for their
services, without any offer of permanent or even long-term employment.
Independent contractors, temporary workers, and part-time workers are
examples of contingent workers. Specifically, independent contractors can
be seen as individuals who obtain customers on their own to provide a
product or service (and who may have other employees working for them),
such as maids, realtors, child care providers, and management consultants.

Research has shown that employers use contingent work arrangements for a
variety of reasons. Employers may hire contingent workers to accommodate
workload fluctuations, fill temporary absences, meet employees' requests
for part-time hours, screen workers for permanent positions, and save on
wage and benefit costs, among other reasons. Previous analyses of data
from the CPS Contingent Work Supplement have indicated that workers also
take temporary and other contingent jobs for a variety of personal and
economic reasons. For example, workers in various types of contingent jobs
indicated that they (1) preferred a flexible schedule to accommodate their
school, family, or other obligations; (2) needed additional income; (3)
could not find a more permanent job; or (4) hoped the job would lead to
permanent employment. Studies using data from the BLS National
Longitudinal Survey of Youth show that events such as the birth of a child
or a change in marital status affect the likelihood of entering different
types of employment arrangements and prompt some workers to enter
contingent work arrangements.

Concerns arise when employers misclassify workers as independent
contractors, who are excluded from certain worker protections. Employee
misclassification occurs when an employer improperly classifies a worker
as an independent contractor when the worker should be classified as an
employee. In 2000, we reported that because most key workforce protection
laws cover only workers who are employees, independent contractors and
certain other contingent workers, such as self-employed workers, are, by
definition, not covered.^4

DOL may encounter employee misclassification while enforcing worker
protection laws. DOL's mission is to promote the welfare of job seekers,
workers, and retirees in the United States by improving their working
conditions, advancing their opportunities for profitable employment,
protecting their retirement and health care benefits, helping employers
find workers, strengthening free collective bargaining, and tracking
changes in employment, prices, and other national economic measurements.
In carrying out this mission, DOL enforces a variety of worker protection
laws, including those guaranteeing workers' rights to safe and healthful
working conditions, a minimum hourly wage and overtime pay, freedom from
employment discrimination, and unemployment insurance.

In particular, DOL's Employment Standards Administration's (ESA) Wage and
Hour Division enforces FLSA. The Wage and Hour Division--with staff
located in 5 regional and 72 district, area, and field offices throughout
the country--conducts investigations of employers who have $500,000 or
more in annual sales volume. In addition, the division conducts outreach
efforts for employers and workers to ensure compliance with FLSA. District
directors oversee investigators, who play a key role in carrying out FLSA
enforcement. Investigators are trained to investigate a wide variety of
workplace conditions and complaints and enforce a variety of labor laws in
addition to FLSA.^5 Regional and district offices conduct outreach to
employers and workers through brochures, workplace posters, presentations
or training sessions for individuals or groups, and Web-based information.

^4GAO, Contingent Workers: Incomes and Benefits Lag Behind Those of Rest
of Workforce, [23]GAO/HEHS-00-76 (Washington, D.C.: June 30, 2000).

^5Complaints are a key component of DOL enforcement efforts under many
federal labor laws. DOL enforcement generally relies on two types of
information to identify potential violations: (1) complaints from
individuals who believe they may have suffered a violation and (2)
analysis of data to specifically target problematic industries or work
sites.

FLSA--which provides minimum wage and overtime pay protections--requires
that employers pay those employees covered by the act at least the minimum
wage and pay overtime wages when they work more than 40 hours a week. FLSA
requires that an employer-employee relationship exist for a worker to be
covered by the act's provisions.

Number and Characteristics of Independent Contractors

In 2005, an estimated 7.4 percent of the total employed workforce were
independent contractors. By comparison, 6.7 percent of the workforce were
independent contractors in 1995. During this time period, the number of
independent contractors grew from an estimated 8.3 million to 10.3 million
workers in 2005. (In 2005, there were about 42.6 million contingent
workers in the workforce--representing an estimated 31 percent of the
workforce.)

Independent contractors, in 2005, were on average 46 years old. The
majority were men (65 percent), had attended or graduated from college,
and 8 out of 10 were white, non-Hispanic. Independent contractors were
employed in a wide range of industries, but in 2005, 23 percent were
employed in professional services and 22 percent were employed in
construction. Regarding occupations, the percentage of independent
contractors in sales and related occupations (17 percent) and management
(16 percent) were greater than in other occupations. In 2005, 9 percent of
independent contractors indicated that they would prefer to work for
someone else. About 11 percent of independent contractors reported family
income below $20,000.

Misclassification of Employees Can Have Negative Outcomes for Workers and
Government Programs

The tests used to determine whether a worker is an independent contractor
or an employee are complex, subjective, and differ from law to law.
Nevertheless, when employees are misclassified as independent contractors,
they may be excluded from coverage under key laws designed to protect
workers and may not have access to certain employer-provided benefits,
such as health insurance coverage and pension plans. Moreover,
misclassification of employees can affect the administration of many
federal and state programs. For example, misclassification could affect
payment of taxes and payments into state workers' compensation and
unemployment insurance programs.

There Is Neither a Single or Simple Test Used to Determine whether a Worker Is
an Independent Contractor or an Employee

No definitive test exists to distinguish whether a worker is an employee
or an independent contractor. The tests used to determine whether a worker
is an independent contractor or an employee are complex, subjective, and
differ from law to law. For example, the National Labor Relations Act, the
Civil Rights Act, the Fair Labor Standards Act, and the Employee
Retirement Income Security Act each use a different definition of an
employee and various tests, or criteria, to distinguish independent
contractors from employees.

In determining whether an employment relationship exists under federal
statutes, courts have developed several criteria. These criteria have been
classified as the economic realities test, the common law test, and a
combination of the two sometimes referred to as a hybrid test. The
economic realities test looks to whether the worker is economically
dependent upon the principal or is in business for him or herself. The
test is not precise, leaving determinations to be made on a case-by-case
basis. The test consists of a number of factors, such as the degree of
control exercised by the employing party over the worker, the worker's
opportunity for profit or loss, the worker's capital investment in the
business, the degree of skill required for the job, and whether the worker
is an integral part of the business. The traditional common law test
examines the employing party's right to control how the work is performed.
To determine whether the employing party has this right, courts may
consider the degree of skill required to perform the work, who supplies
the tools and equipment needed to perform the work, and the length of time
the worker has been working for the employing party. When the tests are
combined in some type of hybrid, a court typically weighs the common law
factors and some additional factors related to the worker's economic
situation, such as how the work relationship may be terminated, whether
the worker receives leave and retirement benefits, and whether the hiring
party pays Social Security taxes.

Aside from the complexities of distinguishing employees from independent
contractors, employers have economic incentives to misclassify employees
as independent contractors. Namely, employers are not obligated to make
certain financial expenditures for independent contractors that they make
for employees, such as paying certain taxes (Social Security, Medicare,
and unemployment taxes), providing workers' compensation insurance, paying
minimum wage and overtime wages, or including independent contractors in
employee benefit plans.

Misclassified Employees May Be Excluded from Coverage under Key Worker
Protection Laws

Contingent workers who are employees are generally protected under key
laws designed to protect workers, but certain categories of contingent
workers--such as independent contractors--may be excluded from coverage
under these laws. While most of the key worker protection laws do not
distinguish between types of employees (i.e., contingent and standard
full-time employees), some laws contain requirements that exclude certain
categories of contingent workers or contain certain time-in-service
requirements that make it difficult for them to be covered. In addition,
because these laws are based on the traditional employer-employee
relationship, they generally cover only workers who are employees;
independent contractors, therefore, are not covered.

Some of the key laws designed to protect workers but that only apply to
"employees" include the following:

           o Fair Labor Standards Act--establishes minimum wage, overtime,
           and child labor standards;
           o Family and Medical Leave Act--requires employers to allow
           employees to take up to 12 weeks of unpaid, job-protected leave
           for medical reasons related to a family member's or the employee's
           own health;
           o Occupational Safety and Health Act--requires employers to
           maintain a safe and healthy workplace for their employees and
           requires employers and employees to comply with all federal
           occupational health and safety standards;
           o National Labor Relations Act--guarantees the right of employees
           to organize and bargain collectively;
           o Unemployment Insurance--pays benefits to workers in covered jobs
           who become unemployed and meet state-established eligibility
           rules; and
           o Workers' Compensation--provides benefits to injured workers
           while limiting employers' liability strictly to workers'
           compensation payments.

When employers have misclassified workers as independent contractors,
workers may need to go to court to establish their employee status and
their eligibility for protection under the laws. In addition, DOL may
bring a lawsuit on behalf of the worker or group of workers to require
that the employer provide the benefit or protection under the law.

Misclassified Employees May Not Have Access to Some Employer-Provided Benefits

Employees who are misclassified as independent contractors, because by
definition they would not be considered employees, may not have access to
certain employer-provided benefits, such as health insurance coverage and
pension plans. Some states and professional associations have developed
health insurance programs that help contingent workers access health care.
While these public and private initiatives are relatively new and
long-term outcomes have yet to be determined, the programs have succeeded
in expanding health insurance options for some contingent workers.

Employee Misclassification Can Affect Administration of Government Programs

Misclassification of employees can affect the administration of many
federal and state programs, such as payment of taxes and pension benefits.
For example, if employers misclassify workers as independent contractors,
then they may not be paying the payroll taxes required to be paid for
employees. At the federal level, misclassification can reduce tax
payments, Medicare payments, and Social Security payments. At the state
level, misclassification can affect payments into state tax, workers'
compensation, and unemployment insurance programs.

DOL Detects and Addresses Employee Misclassification Through Investigations, but
Offices We Studied Vary in How Often They Forward Misclassification Cases to
Other Federal and State Agencies

DOL detects and addresses employee misclassification when enforcing the
FLSA minimum wage and overtime pay provisions. As part of its FLSA
investigation process, DOL examines the employment relationship--whether a
worker is an employee or an independent contractor--to determine which
workers are covered. Investigators use various methods to test the
employment relationship of workers, including interviewing employers and
workers, reviewing payroll and related documents, and touring work sites.
While misclassification alone is not an FLSA violation, it may contribute
to FLSA violations or violations of other laws, such as tax violations.
DOL's outreach efforts provide some information to employers and workers
on employee misclassification issues. DOL procedures require officials to
share information with other federal and state agencies whenever
investigators find possible violations of other laws. However, the
district offices that we contacted vary in how often they forward
misclassification cases as a possible violation of other agencies' laws.

Investigators Determine Workers' Employment Relationship

DOL relies on complaints as a primary way to identify potential violations
for investigation. All FLSA investigations of minimum wage and overtime
pay complaints begin with an examination of workers' employment
relationship because FLSA applies only to employees, not to independent
contractors. If investigators determine that a worker is an employee and
not an independent contractor, they continue with their FLSA investigation
to determine whether the employer has provided the minimum wage and
overtime pay required by the act.

Employee Misclassification, though Not an FLSA Violation, May Contribute to FLSA
or Other Violations

Employee misclassification alone is not a violation of FLSA, but may
contribute to FSLA minimum wage and overtime pay violations or violations
of tax, workers' compensation, or unemployment insurance laws. DOL
investigations have identified FLSA violations associated with employee
misclassification. For example, one misclassification case involved a
valet parking company located in Arizona that provided services to local
restaurants, sports venues, hotels, and theaters. In 2004, this company
paid $66,947 in minimum wage and overtime pay back wages to 262 employees
who had been misclassified as independent contractors. When reviewing the
employment relationship, the DOL investigator found that the services
provided by these workers were integral to the business, and that the
employer had imposed strict policies and procedures to follow, and told
them when they would work, where they would work, what their pay rate
would be, and what uniforms they would wear. The investigator determined
that the workers were not required to use initiative, judgment, or
foresight to be successful as independent contractors, did not have any
investment in facilities or equipment, and were not operating to make a
profit.

DOL's Outreach Efforts Provide Some Information on Employee Misclassification
Issues

As part of general FLSA outreach efforts to employers and workers, DOL
provides some information on establishing the employment relationship.
While these outreach efforts primarily focus on how to comply with
provisions of FLSA--minimum wage, overtime pay, and child labor--they also
include some information on the employment relationship. Specifically,
information on employment relationship issues is available to employers
and workers through brochures, pamphlets, fact sheets, and Web-based
information. According to DOL officials, outreach efforts conducted
specifically for industries likely to use independent contractors may also
address the topic of employee misclassification.

Another form of outreach that DOL provides is its workplace poster. FLSA
regulations require that every employer that has employees subject to the
act's provisions post a notice explaining the act in a prominent and
accessible place at the work site. While DOL relies heavily on complaints
from workers to enforce FLSA, the FLSA workplace poster does not provide a
telephone number for workers or others to call to register complaints.

DOL Offices We Studied Vary in How Often They Forward Misclassification Cases to
Other Federal and State Agencies

Employers' misclassification of workers as independent contractors may in
some circumstances violate tax, unemployment insurance, and workers'
compensation laws. According to the Field Operations Handbook, DOL
regional or district officials are required to share information with
other appropriate federal and state agencies whenever investigators
conducting FLSA investigations find instances of possible violations of
other laws. At the same time, however, the handbook cautions investigators
not to interpret laws outside their authority. We discussed whether DOL
forwards misclassification cases identified during an FLSA investigation.
The DOL officials we spoke to in nine district offices could not provide
the number of misclassification cases they referred to other agencies
because they do not track this information. However, their responses
indicated that district offices vary in how often they implement the
procedures to refer cases to other agencies. Some of the DOL district
offices told us that they notified IRS and state agencies when they found
misclassification, while others told us that they had little or no contact
with other agencies regarding misclassification issues. These district
offices also reported that it was rare for them to receive
misclassification referrals from other federal or state agencies.

Conclusions and Recommendations for Executive Action

DOL investigators identify instances of employee misclassification when
responding to minimum wage and overtime pay complaints. However, because
the FLSA workplace poster does not provide an easy method for workers to
report complaints, DOL may be missing opportunities to address other
instances of potential misclassification. Improving the workplace poster
would reinforce DOL's complaint-based strategy and would help further
protect the wages of employees who may be misclassified.

While DOL investigators conducting FLSA investigations are required to
share information with other federal and state agencies whenever they find
instances of possible violations of other laws, DOL district offices we
studied varied in how often they forwarded misclassification cases to
other agencies. DOL does not know the extent to which district offices
refer misclassification cases to other agencies. DOL cautions
investigators not to interpret laws outside their authority, but referring
misclassification cases identified through FLSA investigations would not
require DOL to interpret other agencies' laws. In addition, referring this
information may assist other federal and state agencies in addressing
misclassification. Furthermore, when DOL does not refer cases of
misclassification, other agencies lose opportunities to fulfill their
fiduciary duties in conserving government funds.

To facilitate the reporting of FLSA complaints, we recommended that the
Secretary of Labor instruct the Wage and Hour Division to revise the FLSA
workplace poster to include national, regional, and district office
telephone numbers and a Web site address that complainants may use to
report alleged employee misclassification issues. Following the
publication of our report, DOL notified the Congress that it was
redesigning the poster and expected the work to be completed in spring
2007.

To facilitate addressing employee misclassification across federal and
state programs, we recommended that the Secretary of Labor instruct the
Wage and Hour Division to evaluate the extent to which misclassification
cases identified through FLSA investigations are referred to the
appropriate federal or state agency potentially affected by employee
misclassification, and take action to make improvements as necessary. In
addressing its referral mechanism, the Wage and Hour Division officials
should consider building upon efforts by district offices currently
engaging in referrals. Following the publication of our report, DOL
notified the Congress that it was researching the nature and effectiveness
of the referral of potential employee misclassification by different
district offices to various federal and state agencies. DOL also noted
that it will consider appropriate revisions to its procedures, and
expected the work to be done by the end of September 2007.

Mr. Chairmen, this concludes my prepared statement. I will be happy to
answer any questions that you or other members of the subcommittees may
have.

GAO Contacts and Staff Acknowledgments

For future information regarding this testimony, I can be contacted at
(202) 512-7215. Key contributors to this testimony were Brett Fallavollita
and Linda Siegel.

(130775)

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www.gao.gov/cgi-bin/getrpt?GAO-07-859T .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Sigurd Nilsen at (202) 512-7215 or
[email protected].

Highlights of [31]GAO-07-859T , a testimony before the Subcommittee on
Income Security and Family Support and Subcommittee on Select Revenue
Measures, Committee on Ways and Means, House of Representatives

May 8, 2007

EMPLOYEE MISCLASSIFICATION

Improved Outreach Could Help Ensure Proper Worker Classification

Some workers do not receive worker protections to which they are entitled
because employers misclassify them as independent contractors when they
should be classified as employees. Key worker protections include minimum
hourly wage and overtime pay and access to unemployment insurance. The
Department of Labor (DOL) enforces several labor laws to protect workers,
including the Fair Labor Standards Act (FLSA). Misclassification can also
have a negative impact on tax collection for Social Security, unemployment
insurance, and other programs. This testimony draws upon a previous GAO
report and focuses specifically on (1) the number and characteristics of
independent contractors, (2) the workforce protections and benefits
provided to employees that typically are not available to independent
contractors, and (3) the actions that DOL takes to detect and address
employee misclassification.

[32]What GAO Recommends

GAO is not making new recommendations at this time. The Department of
Labor generally agreed with the recommendations in the GAO report, which
focused on improvements to a worksite poster reaching out to workers and
DOL's efforts to forward misclassification cases to other agencies.

The number of independent contractors in the total employed workforce grew
from 6.7 percent in 1995 to 7.4 percent in 2005. In 2005, there were 10.3
million independent contractors. Independent contractors, in 2005, had an
average age of 46 years, were almost twice as likely to be male than
female, and almost two-thirds had some college or higher education.
Independent contractors were employed in a wide range of industries (such
as professional services and construction) and occupations (including
sales and management).

When employees are misclassified as independent contractors, they may be
excluded from coverage under key laws designed to protect workers and may
not have access to employer-provided health insurance coverage and pension
plans. Moreover, misclassification of employees can affect the
administration of many federal and state programs, such as payment of
taxes and payments into state workers' compensation and unemployment
insurance programs. Notably, the tests used to determine whether a worker
is an independent contractor or an employee are complex, subjective, and
differ from law to law.

DOL detects and addresses misclassification of employees as independent
contractors by investigating complaints, but does not always forward
misclassification cases to other federal and state agencies. DOL
investigators detect and address employee misclassification primarily when
responding to FLSA minimum wage and overtime pay complaints. DOL
procedures require officials to share information with other federal and
state agencies whenever investigators find possible violations of other
laws. However, the district offices GAO contacted vary in how often they
forward misclassification as a possible violation of other laws. As one
form of outreach to workers, DOL has an FLSA workplace poster that
explains the act, but it is missing key contact information.

References

Visible links
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-06-656
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-06-656
  23. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-00-76
  http://www.gao.gov/
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-07-859T
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