HR Administration

Contract Staffing Under Scrutiny

By Fay Hansen

Jul. 20, 2010

Two job fairs held in July 2010 offered 500 new full-time positions for production workers at BMW’s plant in Spartanburg, South Carolina. MAU, BMW’s staffing partner, will do the hiring, and the new employees will be “contingency associates” employed as contract workers through MAU.

In the same month, ZipRealty, a real estate brokerage firm, announced that as of September 1, 2010, it plans to convert all of its 900 California-based agents from employees to independent contractors. Any new agents signed on in California will be employed as contractors.

Like the jobs at BMW and ZipRealty, most of the positions created in the past six months are temporary or contract jobs, according to data from the U.S. Bureau of Labor Statistics.

Hiring for these positions has driven the modest gains in employment since the end of the recession. Responsibility for hiring these contingent workers often rests with the procurement function, project leaders or hiring managers. Corporate recruiters are still sitting on the sidelines, with few permanent positions to fill.

Employment data indicate that the recession simply accelerated an already long-standing trend toward replacing permanent employees with contingent workers. Expanding the contingent portion of the workforce may have served employers well in other cyclical slowdowns, but the current wave of contingent hiring and the broader trend it represents may not survive the new regulatory environment. Federal and state enforcement agencies are shining a bright light on the use of contract workers.

Enforcement crackdown
  “Over the past year, federal and state governmental agencies have signaled their intent to more seriously investigate the misclassification of employees as independent contractors,” says Michael Royal, a partner and employment law specialist at Fisher & Phillips in Dallas. “The federal government estimates that misclassification of employees as independent contractors will cost the Treasury Department more than $7 billion in lost payroll tax revenues over the next 10 years.”

The Government Accountability Office released a major report on misclassification in August 2009. The report called on the Internal Revenue Service and the Department of Labor to share information with each other and their state counterparts and to coordinate enforcement efforts that target misclassification.

“Consistent with the report, the IRS has signed information-sharing agreements with labor agencies in 29 states, through which the IRS and the state agencies will share the results of misclassification audits,” Royal says. “Additionally, in February 2010 the IRS began an audit of 6,000 different employers over three years in an effort to uncover occurrences of misclassification and to recover lost revenue. Similarly, the Department of Labor has made the proper classification of employees and independent contractors one of its top priorities.”

Other federal agencies are also moving into position to curb misclassification and pursue the compliance issues that will arise if large numbers of independent contractors are reclassified as employees. “Employers should expect that agencies such as the Equal Employment Opportunity Commission will also maintain a heightened sensitivity with regard to these issues in light of the general level of scrutiny,” Royal says.

In addition to enforcement actions from the regulatory agencies, new federal legislation on independent contractors is moving forward. The Taxpayer Responsibility, Accountability and Consistency Act of 2009, introduced in Congress in July 2009, could expose employers to even more scrutiny. “The proposed legislation allows individuals classified as independent contractors to petition the IRS to determine their proper classification, limits the ability of employers to classify individuals as independent contractors, and increases penalties for misclassification,” Royal says.

Another bill, the Employee Misclassification Prevention Act, proposed in Congress in April 2010, was the subject of hearings by the Senate Committee on Health, Education, Labor and Pensions in June. “This legislation would amend the Fair Labor Standards Act to strengthen enforcement and penalties for misclassification of employees as independent contractors,” Royal says.

“If the misclassification accompanied a violation under the Fair Labor Standards Act’s maximum-hours or minimum-wage requirements, a worker could recover double his or her liquidated damages,” or the amount equal to any wages lost, Royal says. “Additionally, the legislation would require the Department of Labor to target industries it determines to have frequent incidents of misclassifying workers for audits, such as the construction industry.”

Bearing down on construction
Numerous federal and state agencies are already investigating misclassification in the construction industry, where 25 percent of all workers are classified as independent contractors, according to the Bureau of Labor Statistics. This increased scrutiny may foreshadow what employers in other industries can expect as federal and state agencies expand their efforts to reduce the number of contract employees.

“Many states, such as Colorado, Illinois, Maryland, Massachusetts, New Jersey and New Mexico, have passed laws aimed at misclassification in the construction industry, which has a history of misclassification issues,” Royal says. He cites as an example the Illinois Employee Classification Act, which restricts the ability of construction contractors to classify workers as independent contractors.

The Illinois law also provides the state’s Department of Labor with broad investigatory and enforcement powers and establishes penalties of up to $1,500 per day for a violation of the act, as well as the amount equal to any wages lost. It also creates a private cause of action, with the right to back pay, lost benefits and lost wages.

“Such damages can be significant,” Royal says. “In December 2009, the Illinois Department of Labor imposed a $328,500 penalty on a construction contractor based on the misclassification of 18 employees.”

Royal advises employers in the construction industry to carefully review their processes for classifying employees.

Construction companies and other service and supply firms that have accepted funds under the American Recovery and Reinvestment Act will be subject to even closer scrutiny. The Office of Federal Contract Compliance Programs is aggressively auditing recipients of ARRA funds. If independent contractors at these firms are reclassified as employees, they will have to be included in OFCCP and EEOC record-keeping requirements.

The shift toward temporary and contract labor is a global phenomenon that is attracting the attention of national and local governments worldwide. In the Canadian province of Ontario, for example, legislation designed to protect temporary workers and promote permanent employment took effect in January 2010.

Some European nations are tightening controls on contract work and temporary staffing agencies. And international organizations, such as the Organization for Economic Cooperation and Development, have called on governments to restrict the growth of “informal” employment arrangements.

Workforce Management Online, July 2010Register Now!

What’s New at

blog workforce

Come see what we’re building in the world of predictive employee scheduling, superior labor insights and next-gen employee apps. We’re on a mission to automate workforce management for hourly employees and bring productivity, optimization and engagement to the frontline.

Book a call
See the software

Related Articles

workforce blog


Minimum Wage by State in 2023 – All You Need to Know

Summary Twenty-three states and D.C. raised their minimum wage rates in 2023, effective January 1.  Thr...

federal law, minimum wage, pay rates, state law, wage law compliance

workforce blog

HR Administration

Is your employee attendance policy and procedure fit for purpose?

Summary: Lateness and absenteeism are early warning signs of a deteriorating attendance policy. — More ...

compliance, HR technology, human resources

workforce blog

HR Administration

Clawback provisions: A safety net against employee fraud losses

Summary Clawback provisions are usually included as clauses in employee contracts and are used to recou...

clawback provisions, human resources, policy