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Labor & Employment Law Alert: Increased Government Scrutiny on Employee Misclassification Issues

February 10, 2010

In yet another sign that wage and hour issues are the hottest area of employment law, the U.S.
Government recently announced two initiatives to step up enforcement of the misclassification of workers
as independent contractors. This development is in addition to the dramatic increase in litigation and
regulatory activity on hours worked and exempt/non-exempt issues, and highlights the need for
employers to review their policies and practices.

The Internal Revenue Service recently announced plans to launch the “Employment Tax National
Research Project” to study employers and payroll taxes, fringe benefits, independent contractors and
other related payroll issues. The project will include three stages of employer audits to take place over
three years and will target 2,000 taxpayers per year. The audits will take place across the country with
employers of all types and sizes. The IRS has stated that it has growing concerns about compliance with
the payment of payroll and self-employment taxes.

President Obama also has proposed in his 2011 budget that the U.S. Department of Labor receive $25
million in additional funding for a “Misclassification Initiative”. If the funding is adopted, the DOL will
hire additional enforcement agents and investigators to focus on identifying employers who misclassify
employees as independent contractors. The DOL has encouraged states to perform additional
misclassification enforcement functions by offering certain grants and incentives. Thirty-seven states,
including Connecticut, have initiatives in place. There are significant consequences for misclassifying
employees as independent contractors, including liability for unpaid overtime, failure to pay minimum
wage, failure to pay payroll taxes, and fines and penalties.

More than ever, it is critical that employers ensure that their wage and hour policies comply with the law.
We intend to provide seminars on this important area throughout the spring of 2010. In the meantime, if
you have questions about how these developments may affect your organization or would like assistance
in performing a compliance review, please contact any member of the Carmody & Torrance LLP Labor
and Employment Practice Group.