California and Louisiana recently became the twelfth and thirteenth states, respectively, to enter into a Memorandum of Understanding with the federal Department of Labor ("DOL") as part of the DOL's effort to detect and correct the improper classification of workers as independent contractors rather than as employees. California and Louisiana joined Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington as states who are participating with the DOL in its Misclassification Initiative.

According to the DOL, the Memorandum of Understanding will enable the DOL to share information and coordinate enforcement efforts with participating states in order to ensure that employees receive the protections to which they are entitled under federal and state employment laws.

The DOL believes that not only does misclassification of workers deny those workers access to benefits and the protections provided by state and federal employment laws, but also it "generates substantial losses to the Treasury and the Social Security Medicare funds as well as to state unemployment insurance and workers compensation funds." http://www.dol.gov/whd/workers/misclassification

In addition to the federal initiative, individual state legislation is increasingly taking aim at reducing misclassification of workers. The state legislation frequently imposes substantial financial penalties on employers. For example, under California's Independent Contractor Misclassification Law, which became effective January 1, 2012, an employer who willfully misclassifies a worker may be subject to financial penalties ranging from $5,000 to $15,000 for each separate violation. Some state legislation, such as Pennsylvania's Construction Workplace Misclassification Act, targets specific industries, such as the construction industry, in which legislators believe misclassification is more likely to occur.

With the increased focus by both state and federal governments on detection and correction of misclassification of workers, employers should review their use of independent contractors and ensure that their workers are properly classified.

Please contact Susan Parrott with any questions.