Increasing pressure

A recent government crackdown could lead to penalties for worker misclassification

According to the U.S. General Accounting Office, 10.3 million U.S. workers were classified as independent contractors in 2005. Between 1995 and 2005, there was a 24 percent increase in the number of workers classified as independent contractors. However, a report released by the Internal Revenue Service (IRS) in February estimates at least 15 percent of employers misclassify their workers.

By classifying employees as independent contractors, which sometimes is referred to as "1099ing" based on IRS form 1099 issued to independent contractors, an employer can avoid withholding income taxes, withholding and paying Social Security and Medicare taxes, and paying unemployment taxes on wages paid to employees. According to the IRS, worker misclassification results in the loss of at least $1.6 billion of federal tax revenue each year. Employers who classify all their workers as independent contractors also are not subject to the Family and Medical Leave Act or minimum wage and overtime pay requirements.

A concerted effort

Early in 2007, the IRS announced a renewed effort to identify and punish employers who improperly classify employees as independent contractors. By the end of 2007, the IRS had made good on its promise. In December of that year, FedEx announced the IRS had ordered it to pay $319 million in back taxes, fines and interest in connection with 13,000 ground delivery drivers the IRS believed FedEx had misclassified as independent contractors in 2002.