[caption id="attachment_37590" align="alignright" width="343" caption="Dawn Ross, Richard Rybicki, Chris Mazzia"][/caption]

NORTH BAY -- The U.S. Department of Labor is seeking to significantly bolster its regulatory reach to investigate companies employing “independent contractors” and whether they are classified correctly -- an already-tricky area for many employers that can have serious consequences, according to legal experts.

As part of its 2012 budget request, the Department of Labor’s Wage and Hour Division is hoping to establish a new multi-agency Misclassification Initiative “that will strengthen efforts to enforce labor violations that result from the misclassification of employees as ‘independent contractors’” whose payment is reported on Form 1099.

Much time and politics remains until 2012, but attorneys said the issue is already a thorny one for many employers, across a broad spectrum of industries and sizes.

Because the tax rates vary for both the independent contractor and the employers, the issue often manifests itself after the contractor has left or is terminated. Employers could face steep tax penalties if they’re found to have misclassified someone, said Richard Rybicki of Rybicki and Associates, a labor and employment law firm in Napa.

“Employers very seldom think about how they’re going to categorize employees,” he said. “If you’re assessed by the government for back taxes, the taxpayer has the burden of proof, which makes it extremely difficult to win those claims,” against the government.

Misclassification of employee or independent contractor “has a whole host of unintended consequences,” Mr. Rybicki added.

The request by the Wage and Hour Division of about $15.2 million would create over 3,200 investigations into the issue, according to the budget proposal, which totals $12.8 billion.

Employers who rely on independent contractors likely have not paid into unemployment insurance or workers’ compensation funds, and that can have significant consequences, said Dawn Ross, a partner with Carle, Mackie, Power & Ross in Santa Rosa who specializes in employment law.

“This is an important issue and comes up in a few ways,” Ms. Ross said. “The penalties can be quite large, depending on how the issue came up.”

Some ways of the issue arising include if the person files for unemployment insurance after their services are no longer needed, if they get hurt on the job and file a worker’s comp claim, or if the person sues for unpaid wages, which in turn would require a determination of whether that person should have been classified as an employee and not an independent contractor, according to Ms. Ross.

Chris Mazzia, an employment attorney with Anderson, Ziegler, Disharoon, Gallagher & Gray in Santa Rosa, said the issue does indeed come up frequently, and that employers should think carefully about the classifications.

“What employer might do is take a look at their independent contractor relationships with a fresh view,” he said. “If you’re a third party, how would you view it? Is it truly someone who you don’t exercise enough control over to call an employee?”

If not, Mr. Mazzia said, an employer ought to reconsider the relationship, adding that even if a contract is in place with an independent contractor beforehand, that may not be enough to avoid tax penalties down the road.

“That isn’t the final answer to the question,” he said.

Employers get into particular trouble if the independent contractor files for unemployment after completing a job, which could prompt attention from the IRS or the EDD, according to Mr. Rybicki.

“The auditor will assume that everyone who is an independent contractor is an employee,” he said.

Mr. Mazzia and Mr. Rybicki both said that employers who have freelance workers and full-time employees working side by side, doing similar work, may want to reassess the classification -- before the EDD or IRS does it for them.

Simply following standard industry practice probably isn’t wise, Mr. Mazzia added.

“Following what others in your industry do isn’t always the safest approach,” he said.

Many smaller businesses trying to keep costs down may rely heavily on independent contractors. Likewise with businesses looking to downsize, particularly in light of the recent Great Recession, Mr. Rybicki said.

In California, employers have to file a DE542, which notifies the state that independent contractors are being utilized.

“Once you file that, they know who you are,” Mr. Rybicki said. “The number one lesson -- you can’t just call the person an independent contractor.”