More Independent Contractor Audits Ahead? ESD Receives Federal Grant to Hire More Auditors.

Washington State’s Employment Security Department (ESD) recently announced that it has received $415,935 in federal funds to audit employers who misclassify workers as independent contractors. According to ESD, the funds will be used to hire two new employees who will audit employers who misclassify employees and independent contractors, and who otherwise fail to report and pay unemployment taxes. ESD anticipates that the funds will assist in identifying several hundred misclassified employees and several million dollars in unreported wages.

ESD’s press release reads in full:

OLYMPIA – The misclassification of workers as independent contractors  — or failure to classify them at all — is a problem in Washington and across the country. The U.S. Department of Labor (USDOL) awarded federal funds to Washington’s Employment Security Department (ESD) this week to hire two new employees who will audit employers who fail to report wages paid to workers and avoid paying unemployment taxes.

USDOL awarded Washington $415,935 as part of $10 million in state grants that aim to identify instances where employers misclassify employees or fail to report the wages paid to workers at all.

Worker misclassification occurs when an employer is erroneously classified by an employer as an independent contractor, or not classified at all. 

ESD’s Underground Economy Unit expects to detect an estimated 430 additional misclassified employees and nearly $7 million more in unreported wages each year.

“The Underground Economy Unit levels the playing field to ensure all employers pay their fair share,” said ESD’s Tax & Wage Deputy Director Una Wiley. “Employers who don’t pay their fair share of unemployment taxes are able to undercut their competitors who abide by the rules.”

“In addition to denying workers access to critical benefits and protections to which they are entitled, worker misclassification generates substantial losses to state unemployment funds,” DOL stated in a news release.

To help employers comply with laws, USDOL has issued an administrator’s interpretation that analyzes how the Fair Labor Standards Act’s definition of “employ” guides the determination of whether workers are employees or independent contractors under the law. It discusses the breadth of the FLSA’s definition of “employ,” and provides guidance on the “economic realities” factors applied by courts in determining if a worker is indeed an employee.

Ultimately, the goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee) or is really in business for him or herself (and is therefore an independent contractor).



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