1099 Risk Blog

Budget 2011: the DOL Rises, and What's This $8 Billion For?

Monday's release of Obama's fiscal year 2011 Budget has generated a flurry of excitement among employment lawyers and contingent workforce program managers regarding an increase of $25 million specifically allocated for the Department of Labor (DOL) to go after worker misclassification in a joint effort with the Treasury. The efforts are expected to increase Treasury receipts by more than $7 billion over a ten year span (a figure I believe is underestimated based on my understanding of the tax gap). But the $25 million line item in the budget by itself doesn't tell the whole story of what's intended for the future of worker classification enforcement in Obama's 2011 budget proposal. There's more, and the other pieces actually dwarf the $25 million for the joint DOL-IRS enforcement plan. What's this $8 billion line item for, huh? And why aren't the pundits talking about that?

What the Budget Says About the DOL's Misclassification Enforcement Role

So, for starters, here's the summary description from the Obama budget document regarding the DOL-IRS joint misclassification enforcement program (for those of you who want to read in the full text, this passage starts on page 100 of the 2011 Budget):

When employees are misclassified as independent contractors, they are deprived of benefits and protections to which they are legally entitled. For example, independent contractors do not receive overtime and are ineligible to receive unemployment benefits. Misclassification also has a budgetary impact, reducing receipts in Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds. As part of the 2011 Budget, the Departments of Labor and Treasury are pursuing a joint proposal that eliminates incentives in law for employers to misclassify their employees; enhances the ability of both agencies to penalize employers who misclassify; and restores protections to employees who have been denied them because of their improper classification. This proposal would increase Treasury receipts by more than $7 billion over 10 years. The 2011 Budget for DOL includes an additional $25 million to target misclassification with 100 additional enforcement personnel and competitive grants to boost States’ incentives and capacity to address this problem.

With that in mind, it is clear from the proposed budget that the DOL, having been publicly thrashed in the recent GAO report on employee misclassification, not only has a mandate to get with the program, but will have funding to carry that mandate out.

Now of course the budget has to pass, but of all the items in the budget that are at risk, this is probably not one of them; the measure pays for itself many times over with the revenue capture it involves.

So What Else Is In the Obama Budget That Impacts IC Compliance?

If you're excited about a $25 million increase to fund the DOL's joint project with the IRS, how about an investment of over $8 billion in the Internal Revenue Service’s enforcement and modernization programs? The budget ". . . supports significant new revenue-generating initiatives that will target critical areas of non-compliance, and enhances a multi-year modernization strategy that will deliver a vastly improved IRS within the next five years."

$8 Billion Dollars? What Do They Mean, "Critical Areas of Non-Compliance?"

Here's a longer excerpt:

The Budget supports the IRS’ continued progress in reducing the tax gap through fair,
robust, and equal application of the tax laws—including new revenue-generating enforcement initiatives that will increase recovery of tax debts by nearly $2 billion a year once the initiatives are fully mature in 2013 . . . The Budget also includes a set of innovative legislative proposals to improve the fairness, effectiveness and efficiency of tax administration, which will also narrow the tax gap.

I'll be preparing a separate article covering the nature of this aforementioned tax gap, and where it comes from, so that you can more adeptly read between the lines on this budget item. I'll back up this statement in that forthcoming post, but for now, suffice to say that the lion's share of the tax gap is due to non-filing or under-reporting of taxes on behalf of individual sole proprietors (1099s) and self-incorporated independent contractors -- many of whom the IRS believes to be misclassified. When the IRS refers to targeting "critical areas of non-compliance" I think you know what I am saying.

So $25 million for DOL to get its act together on misclassification is surely exciting, but I find the $8 billion modernization project for the IRS nothing to sniff at. And that's not all, either. Back to the DOL section of the budget, the $25 million for the joint IRS-DOL employee misclassification enforcement program isn't the only line item to pay attention to.

Worker Protection Programs, Too . . . With Overflow Results

How about a $67 million increase for DOL's worker protection programs? The Wage and Hour compliance division alone of DOL would get $20 million of this additional funding for 2011, hiring an additional 90 investigators. While this division of DOL is not specifically targeted at misclassified employees, as we all know, the fact of workers being misclassified means that virtually all other areas of worker protections aren't being handled correctly, including wage and hour.

Here is the Obama budget excerpt:

The Budget includes a $67 million (4 percent) increase for the Department’s worker protection agencies to ensure they have the resources to meet their responsibilities to protect the health, safety, wages and working conditions, and retirement security of the nation’s workforce. The 2011 Budget builds on the 2010 Budget policy of returning
worker protection programs to the 2001 staffing levels, after years of decline. In
addition, the Budget provides additional resources for the regulatory and enforcement activities of these agencies.

What's the Takeaway?

These budget provisions, taken together, illustrate a theme that I'm seeing consistently across the courts, in the Congress, and now here in the budgets of regulatory agencies. President Obama mentions in his preface to the budget that the horizon is beckoning. I'd name that horizon, "Compliance."

For a long time, businesses have been able to shrug at the complexity, roll the dice, and expect to get away with practices that were not fully compliant with the law (if they could even figure out what that would mean in practice!). Now, as we enter a new decade, the stakes are being raised, and I think the odds are getting harsher. Lady Luck has left the room.

Some things to expect over the next two to five years:

• Federal agencies will be getting smarter, fast. The IRS's national research project to audit 6000 companies for worker misclassification and compensation compliance is only the beginning. It's essentially a recon mission in preparation for a much bigger onslaught, and they've said as much. 
• The States will be receiving Federal grants to step up compliance, share data with the Feds, and more effectively enforce the law and collect tax revenue. Grants or not, they cannot afford to do otherwise, and most states are already collaborating with the IRS and other agencies.
• Interagency task forces are being set up in dozens of states, and anonymous tip lines are being set up so that businesses can tell on their competitors and workers can report improper classification.
• Loopholes such as Section 530 Safe Harbor will likely be going away.
• Worker reporting mechanisms, such as Form 8919, may be used in future IRS enforcement initiatives to flag potential audit targets, similar to how the SS-8 is purportedly used today. The 8919 information is now in the third year of being collected. Is your company being reported? Would you even know?
• Civil, class action lawsuits will continue to bubble up, costing businesses who misclassify employees as independent contractors as much as $8 million in consequences, per worker! No need for legislation or enforcement budgets. Class action lawsuits are apparently a self-funding game, and there's no sign of this litigious climate cooling down. The "business model" is a proven one for lawyers and plaintiffs alike. 

It isn't pretty. Especially for well meaning businesses that have no malicious intention of violating the law. Especially when we are in the midst of a workforce transformation that will see as much as 50% of the jobs created during the recovery hired as contingent labor, according to data published last year by Littler Mendelson.

You've got some time, but not a lot. Use it well.

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