Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification
Published: 2006-07-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Millions of U.S. workers participate in "contingent" employment, such as temporary or part-time work, and not in permanent or full-time jobs. The Department of Labor (DOL) enforces several labor laws to protect these and other workers, including the Fair Labor Standards Act (FLSA), which provides minimum wage, overtime pay, and child labor protections. In June 2000, GAO reported that contingent workers lagged behind standard full-time workers in terms of income, benefits, and workforce protections, and that some employees do not receive worker protections because employers misclassified them as independent contractors. GAO was asked to update this report by describing (1) the size and nature of the contingent workforce, (2) the benefits and workforce protections provided to contingent workers, and (3) the actions that DOL takes to detect and address employee misclassification. We analyzed DOL survey data on contingent workers and interviewed DOL officials.
section_title: What GAO Found
paragraphs: Contingent workers constituted a relatively constant proportion of the total workforce from 1995 through 2005 and had diverse characteristics. While the population of the contingent workforce grew by an estimated 3 million workers during this time period, the proportion of contingent workers in the total workforce remained relatively constant at about 31 percent. In 2005, there were about 42.6 million contingent workers in the workforce. Contingent workers vary in terms of their demographic characteristics, industries, and occupations. For example, on average, contingent workers range in age from about 35 years for one category of temporary workers to about 48 years for self-employed workers. In addition, contingent workers are employed in a wide range of industries and occupations, including the services industry, construction, and retail trade. A smaller proportion of contingent workers than of standard full-time workers has health insurance or pension benefits, or is protected by key workforce protection laws, including laws designed to ensure proper pay and safe, healthy, and nondiscriminatory workplaces. While 72 percent of standard full-time workers received employer-provided health insurance in 2005, the proportion of contingent workers who received employer-provided health insurance ranged from 9 to 50 percent, depending on the category of contingent worker. With regard to pension benefits, 76 percent of standard full-time workers reported working for an employer who offered a pension, whereas 17 to 56 percent of contingent workers reported working for an employer who offered a pension. One reason that contingent workers are less likely to receive protections is that some laws contain requirements that exclude certain categories of contingent workers. DOL detects and addresses misclassification of employees by investigating complaints, but does not always forward misclassification cases to other federal and state agencies. Some workers do not receive worker protections to which they are entitled because employers misclassify them as independent contractors--a category of contingent workers excluded from many protections--when they should be classified as employees. DOL investigators detect and address employee misclassification primarily when responding to FLSA minimum wage and overtime pay complaints. DOL investigators examine whether a worker is an employee or an independent contractor to determine coverage under FLSA. DOL relies heavily on complaints from workers to enforce FLSA, but the FLSA workplace poster does not contain any information on employment classification or provide a telephone number for individuals to register complaints. Misclassification of employees may contribute to an FLSA violation or may violate laws enforced by other agencies, such as tax laws. DOL procedures require officials to share information with other federal and state agencies whenever investigators find possible violations of other laws. However, the district offices we contacted vary in how often they forward misclassification as a possible violation of other agencies' laws.

section_title: Letter
paragraphs: Millions of workers in the U.S. economy participate in some form of  “contingent” employment, such as temporary or part-time work. While  definitions of the contingent workforce vary, broadly defined, contingent  workers are workers who do not have standard full-time employment, that  is, are not wage and salary workers working at least 35 hours a week in  permanent jobs. Contingent work arrangements often have the potential to  provide flexibility for employers and workers. However, such  arrangements may also exclude some contingent workers from receiving  key worker benefits and protections such as the guarantee of workers’  rights to safe and healthful working conditions, a minimum hourly wage  and overtime pay, freedom from employment discrimination, and  unemployment insurance. The Department of Labor (DOL) enforces a  wide range of labor laws that provide protections to workers, including  the Fair Labor Standards Act (FLSA), which provides minimum wage,  overtime pay, and child labor protections. Other federal and state agencies  enforce laws that provide workers with additional workforce benefits and  protections.
In June 2000, we reported that contingent workers, as broadly defined,  constituted almost 30 percent of the workforce and that compared with  standard full-time workers, contingent workers lagged behind in terms of  income and benefits. We also reported that some workers do not receive  worker protections to which they are entitled because employers  misclassify them as independent contractors—a category of workers that  is excluded from many protections—when they should be classified as  employees. In its last comprehensive misclassification estimate, the  Internal Revenue Service (IRS) estimated that 15 percent of employers  misclassified 3.4 million workers as independent contractors in 1984,  resulting in an estimated tax loss of $1.6 billion (or $2.72 billion in  inflation-adjusted 2006 dollars) in Social Security tax, unemployment tax,  and income tax.
In this context, you asked us to update our work on contingent workers  and review employee misclassification issues. Specifically, you asked us to  examine (1) the size and nature of the contingent workforce, (2) the  benefits and workforce protections provided to contingent workers, and  (3) the actions that DOL takes to detect and address employee  misclassification.
To respond to your request, we analyzed data from the Bureau of Labor  Statistics’ (BLS) Current Population Survey (CPS), which is used to survey  people about their work and workplace benefits, and a CPS supplement  developed to collect information on the contingent workforce. We used  this CPS contingent workforce supplement to produce estimates of  characteristics of contingent workers, their receipt of health insurance,  and their participation in pension programs. To ensure reporting  consistency, we used the same definition of contingent workers that we  used in our 2000 report. This definition included eight categories of  contingent workers: agency temporary workers (temps), direct-hire temps,  on-call workers, day laborers, contract company workers, independent  contractors, self-employed workers, and standard part-time workers. We  interviewed BLS officials and other researchers about contingent worker  issues. We also reviewed key workforce protection laws to determine  coverage of contingent workers. To obtain information on DOL’s efforts to  detect and address employee misclassification as part of FLSA  enforcement, we reviewed DOL documents and interviewed DOL officials  from headquarters, 3 of 5 regional offices, and 9 of 51 district offices. We  also reviewed literature and interviewed researchers about employee  misclassification issues. We performed our work in accordance with  generally accepted government auditing standards between July 2005 and  June 2006. Appendix I provides detailed information on the scope and  methodology of our work.
subsections: section_title: Background
paragraphs: The term “contingent work” can be defined in many ways to refer to a  variety of nonstandard work arrangements. Broadly defined, “contingent  work” refers to work arrangements that are not long-term, year-round, full- time employment with a single employer. For example, an employer may  hire workers when there is an immediate and limited demand for their  services, without any offer of permanent or even long-term employment.  Temporary workers, independent contractors, and part-time workers are  examples of contingent workers. In 2000, we reported our definition of  contingent workers that we also used in this report. Figure 1 shows this  definition, which includes eight categories of contingent workers.
Research has shown that employers use contingent work arrangements for  a variety of reasons. Employers may hire contingent workers to  accommodate workload fluctuations, fill temporary absences, meet  employee’s requests for part-time hours, screen workers for permanent  positions, and save on wage and benefit costs, among other reasons.  Previous analyses of data from the CPS Contingent Work Supplement have  indicated that workers also take temporary and other contingent jobs for a  variety of personal and economic reasons. For example, workers in  various types of contingent jobs indicated that they (1) preferred a flexible  schedule to accommodate their school, family, or other obligations;   (2) needed additional income; (3) could not find a more permanent job; or  (4) hoped the job would lead to permanent employment. Studies using  data from the BLS National Longitudinal Survey of Youth show that events  such as the birth of a child or a change in marital status affect the  likelihood of entering different types of employment arrangements and  prompt some workers to enter contingent work arrangements.
Concerns arise when employers misclassify workers as independent  contractors, who are in a category of contingent workers excluded from  certain worker protections. Employee misclassification occurs when an  employer improperly classifies a worker as an independent contractor  when the worker should be classified as an employee. In 2000, we  reported that because most key workforce protection laws cover only  workers who are employees, independent contractors and certain other  contingent workers, such as self-employed workers, are, by definition, not  covered. (See app. IV for a more detailed description of these key laws.)
Misclassification of employees can affect the administration of many  federal and state programs, such as payment of taxes and pension  benefits. For example, if employers misclassify workers as independent  contractors, then they may not be paying the payroll taxes required to be  paid for employees. At the federal level, misclassification can reduce tax  payments, Medicare payments, and Social Security payments. At the state  level, misclassification can affect payments into state tax, workers’  compensation, and unemployment insurance programs. Table 1 shows key  federal and state agencies that can be affected by employee  misclassification issues.
DOL may encounter employee misclassification while enforcing worker  protection laws. DOL’s mission is to promote the welfare of job seekers,  workers, and retirees in the United States by improving their working  conditions, advancing their opportunities for profitable employment,  protecting their retirement and health care benefits, helping employers  find workers, strengthening free collective bargaining, and tracking  changes in employment, prices, and other national economic  measurements. In carrying out this mission, DOL enforces a variety of  worker protection laws, including those guaranteeing workers’ rights to  safe and healthful working conditions, a minimum hourly wage and  overtime pay, freedom from employment discrimination, and  unemployment insurance.
In particular, DOL’s Employment Standards Administration’s (ESA) Wage  and Hour Division enforces FLSA. The Wage and Hour Division—with  staff located in 5 regional and 72 district, area, and field offices throughout  the country—conducts investigations of employers who have $500,000 or  more in annual sales volume. In addition, the division conducts outreach  efforts for employers and workers to ensure compliance with FLSA.  District directors oversee investigators, who play a key role in carrying out  FLSA enforcement. Investigators are trained to investigate a wide variety  of workplace conditions and complaints and enforce a variety of labor  laws in addition to FLSA. Regional and district offices conduct outreach  to employers and workers through brochures, workplace posters,  presentations or training sessions for individuals or groups, and Web- based information.
FLSA—which provides minimum wage and overtime pay protections— requires that employers pay those employees covered by the act at least  the minimum wage and pay overtime wages when they work more than   40 hours a week. FLSA requires that an employer-employee relationship  exist for a worker to be covered by the act’s provisions. The act defines  “employee” broadly as an individual employed by an employer. The U.S.  Supreme Court has identified certain factors to be considered in  determining whether a worker meets the FLSA definition of employee.  Appendix II contains more information on establishing the employment  relationship under FLSA.
section_title: Contingent Workers Constitute a Relatively Constant Proportion of the Workforce and Are Diverse
paragraphs: Contingent workers constituted a relatively constant proportion of the  total workforce from 1995 through 2005 and had diverse characteristics.  While the number of contingent workers grew by an estimated 3 million  during this time period, the contingent proportion of the total workforce  remained relatively constant. In 2005, there were about 42.6 million  contingent workers in the workforce. The different categories of  contingent workers vary in terms of demographic characteristics,  industries, occupations, preferences for the type of job that they currently  hold, and incidence of low family income. Appendix III contains detailed  information on changes in the size of the contingent workforce and  characteristics of contingent workers.
subsections: section_title: Contingent Workers’ Proportion of the Total Workforce Has Changed Little over the Past Decade
paragraphs: In 2005, an estimated 31 percent of the workforce could be considered to  maintain a contingent work arrangement. As shown in table 2, while the  number of contingent workers grew from 39.6 million workers in 1995 to  42.6 million workers in 2005, contingent workers’ share of the total  workforce remained relatively constant over this time period.
section_title: Contingent Workers Are a Diverse Group
paragraphs: The categories of contingent workers differ considerably in terms of their  share of the contingent workforce. In 2005, standard part-time workers  constituted the largest category (43 percent) and contract company  workers constituted the smallest category (2 percent) of the contingent  workforce (see fig. 2).
Contingent workers exhibit a wide range of demographic characteristics.  For example, direct-hire temps (with a mean age of about 35 years) were,  on average, the youngest contingent workers in 2005, while self-employed  workers (with a mean age of about 48 years) were the oldest. An  estimated 68 percent of standard part-time workers were female, while  about 31 percent of contract company workers were female. Self- employed workers had the highest percentage (81 percent) of white/non- Hispanic workers, while agency temps had the smallest percentage   (50 percent) of white/non-Hispanic workers. Standard part-time workers  had the highest percentage (21 percent) of workers with less than a high  school degree, while self-employed workers and independent contractors  had the lowest percentages (8 percent).
Contingent workers are employed in a wide range of industries and  occupations. Regarding industry, in 2005, the percentage of part-time  workers employed in retail trade (38 percent) was greater than in other  industries, the percentage of agency temps in business services   (28 percent) was greater than in other industries, the percentage of direct- hire temps in educational services (28 percent) was greater than in other  industries, and the percentage of independent contractors in construction  (22 percent) was greater than in other industries. Regarding occupation, in  2005, the percentage of self-employed workers in management   (29 percent) was greater than in other occupations, the percentage of  agency temps in office and administrative support (25 percent) was  greater than in other occupations, and the percentage of contract company  workers in construction and extraction (20 percent) was greater than in  other occupations.
The extent to which contingent workers express a preference for a  different type of employer or job also varies across the different categories  of contingent workers. For example, in 2005, 59 percent of agency temps  expressed a preference to work for a different type of employer. Similarly,  48 percent of on-call workers/day laborers indicated that they would  prefer a job where they worked regularly scheduled hours. In contrast,   9 percent of independent contractors and 8 percent of self-employed  workers indicated that they would prefer to work for someone else.
The proportion of contingent workers reporting low family incomes varies  considerably across the different categories of contingent workers. As  shown in table 3, while 16 percent of the overall contingent worker  population reported family incomes below $20,000 in 2005, the incidence  of low family income ranged from 8 percent for self-employed workers  (the same percentage as for standard full-time workers) to 28 percent  among agency temps. The relatively high incidence of low family income  among some groups of contingent workers may reflect a number of  factors, including lower levels of educational attainment, lower number of  hours worked, or employment in low-wage sectors of the economy.
section_title: A Smaller Proportion of Contingent Workers than Others Has Benefits or Is Covered by Key Workforce Protection Laws
paragraphs: A smaller proportion of contingent workers than of standard full-time  workers has health insurance or pension benefits, or receives protections  offered by key workforce protection laws, including ones designed to  ensure proper pay and safe, healthy, and nondiscriminatory workplaces. A  smaller proportion of contingent workers than of standard full-time  workers has employer-provided health insurance coverage. When other  sources of health insurance are taken into account, the difference between  contingent and standard full-time workers decreases, but it remains the  case that a smaller proportion of contingent workers is insured. In  addition, a smaller proportion of contingent workers than of standard full- time workers has employers who offer pension plans or is included in  employer-provided plans. Finally, contingent workers are less likely than  standard full-time workers to receive protections offered by key  workforce protection laws. Some laws contain requirements that exclude  certain categories of contingent workers or contain certain time-in-service  requirements that make it difficult for them to be covered. In addition, in  cases where contingent workers have more than one employer, it is  difficult to determine which employer is responsible for providing workers  with workforce protections. Appendix IV contains a detailed description  of the key workforce protection laws.
subsections: section_title: A Smaller Proportion of Contingent Workers than Others Receives Health Insurance
paragraphs: The proportion of contingent workers receiving health insurance is  smaller than the proportion of standard full-time workers receiving health  insurance. Overall, an estimated 13 percent of contingent workers  received health insurance through their employer in 2005, compared to   72 percent of standard full-time workers. As shown in figure 3, the share of  contingent workers receiving employer-provided health insurance ranged  from 9 percent for agency temps to 50 percent for contract company  workers.
Although the proportion of contingent workers who received health  insurance increased significantly when other sources of health insurance  were taken into account, a smaller proportion of contingent workers than  of standard full-time workers received health insurance from any source.  Overall, about 73 percent of contingent workers received health insurance  through any source in 2005, compared to 87 percent of standard full-time  workers. The share of contingent workers who received health insurance  through any source ranged from 41 percent among agency temps to   81 percent among contract company workers. As might be expected, a  smaller proportion of workers with low family incomes received health  insurance than of workers of all income levels. Overall, the highest  percentage of contingent workers who had health insurance through a  source other than their employer received it from their spouse’s health  insurance plan. Contingent workers also reported receiving health  insurance through other family members’ plans, plans offered through  other or previous jobs, direct purchase, or participating in Medicare or  Medicaid programs.
Workers may lack access to employer-provided health insurance for a  number of reasons, including electing not to participate in an available  plan, having an employer who does not offer a health insurance plan, or  being ineligible for their employer’s plan if one is offered. Just over half of  workers—both contingent and standard full-time—who lacked employer- provided health insurance coverage in 2005 worked for an employer who  offered health insurance to some of its employees. Not all workers  reported being able to participate in their employer’s health insurance  plan. An estimated 38 percent of the contingent workers in this group  reported that they could participate in their employer’s health insurance  plan if they wanted to, compared to 81 percent of standard full-time  workers. Both contingent and standard full-time workers reported several  reasons for not participating in health insurance plans offered by their  employer, including having coverage through another plan and the  expense of their employer’s plan.
Some states and professional associations have developed health  insurance programs that help contingent workers access health care. For  example, Massachusetts recently passed legislation that will make health  insurance available to all residents of the state, including contingent  workers such as part-time workers, contractors, and self-employed  workers. This new law provides for health insurance premium assistance  for low-income workers as well as low-cost policies available for purchase  in the private market. In addition, Maine recently created the Dirigo  program, which provides low cost health insurance to self-employed  workers and workers without employer-sponsored insurance. Similarly,  New York’s Healthy NY program helps uninsured workers, including self- employed workers, who earn too much to qualify for Medicaid access  comprehensive health insurance. Professional associations are also  creating health plans to serve contingent workers. For example, the HR  Policy Association—a nonprofit organization of senior human resources  executives of Fortune 500 companies—recently brought major health  insurers and large companies together to create the National Health  Access program. This program provides a range of low-cost health plans to  part-time, seasonal, and temporary workers, as well as independent  contractors at participating companies who are ineligible for the  companies’ traditional health plans. While these public and private  initiatives are relatively new and long-term outcomes have yet to be  determined, the programs have succeeded in expanding health insurance  options to some contingent workers.
section_title: A Smaller Proportion of Contingent Workers than Others Has Access to Employer-Provided Pensions
paragraphs: A smaller proportion of contingent workers than of standard full-time  workers has employers who offer pensions or is included in their  employer’s pension plans. Overall, 38 percent of contingent workers  reported having employers who offered a pension in 2005, compared to   76 percent of standard full-time workers. Similarly, while 17 percent of  contingent workers reported being included in their employers’ pension  plan, 64 percent of standard full-time workers reported being included in  such plans. As shown in figure 4, with the exception of agency temps, 53 to  56 percent of the contingent workers in other categories reported having  employers who offered pension plans. The percentage of contingent  workers who were included in employer-provided pension plans ranged  from 4 percent for agency temps to 37 percent for contract company  workers.
Among contingent workers with employers who offered pension plans, the  most frequently reported reasons for not being included in the plan were  those related to eligibility. For example, these workers reported that they  were not allowed to join the plan, they had not worked enough hours or  weeks, or they had not worked long enough to be eligible.
In addition to employer-provided pension plans, other types of tax  deferred retirement accounts (such as individual retirement accounts and  Keogh plans) may offer workers an opportunity to save for retirement. A  larger proportion of self-employed workers and independent contractors  than of other categories of contingent workers reports having other types  of tax deferred retirement accounts. For example, 45 percent of self- employed workers and 42 percent of independent contractors, compared  to 16 percent of standard full-time workers, reported having such accounts  in 2005.
Contingent workers with low family incomes have less access to  employer-provided pension benefits than workers of all income levels.  Overall, 29 percent of contingent workers with low family incomes  reported having employers who offered pension plans in 2005; 7 percent of  contingent workers with low family incomes reported being included in  such plans. Contingent workers with low family incomes commonly  reported that they were not included in their employer’s pension plan for  reasons related to eligibility; for example, they were not allowed to join  the plan, they had not worked enough hours or weeks, or they had not  worked long enough to be eligible.
section_title: Some Categories of Contingent Workers Are Not Covered by Key Laws Designed to Protect Workers
paragraphs: Contingent workers who are employees are generally protected under key  laws designed to protect workers, but certain categories of contingent  workers—such as independent contractors and self-employed workers— may be excluded from coverage under these laws. While most of the key  worker protection laws do not distinguish between types of employees  (i.e., contingent and standard full-time employees), some laws contain  requirements that exclude certain categories of contingent workers or  contain certain time-in-service requirements that make it difficult for them  to be covered. In addition, because these laws are based on the  traditional employer-employee relationship, they generally cover only  workers who are employees; independent contractors and self-employed  workers, therefore, are not covered. According to the 2005 Contingent  Work Supplement, 10.3 million individuals are independent contractors;  these individuals would not be covered by these workforce protection  laws.
When employers have misclassified workers as independent contractors,  workers may need to go to court to establish their employee status and  their eligibility for protection under the laws. In addition, DOL may bring a  lawsuit on behalf of the worker or group of workers to require that the  employer provide the benefit or protection under the law. As shown in  figure 5, the key workforce protection laws cover a wide range of issues.
Certain categories of contingent workers, such as temporary, on-call, and  part-time workers, are not covered by some of the laws designed to  protect workers. For example, the Family and Medical Leave Act requires  workers to have worked for the same employer at least 12 months and a  minimum of 1,250 hours during the past 12 months to be covered. These  conditions decrease the likelihood that workers who are temporary, on- call, or part-time will be covered. Although employers are not required to  provide pension or health care plans to their employees, when plans are  offered, the Employee Retirement Income Security Act (ERISA) has rules  that govern which employees must be included in the plans in order to  qualify for special tax treatment. For example, ERISA allows employers to  exclude workers who have worked less than 1,000 hours in a 12-month  period from entering their pension plans. ERISA also allows employers to  exclude employees who have worked for the company less than 3 years as  well as part-time and seasonal employees from the count of employees  who must be included in self-insured medical plans and group term life  insurance plans. As a result, some temporary, on-call, and part-time  workers may not be included in their employers’ benefit plans. These  exclusions are intended to strike a balance between providing benefits to  workers and not be unduly burdening employers. For example, the  exclusions in ERISA were enacted to recognize that it may be impractical  or too costly for employers to include all short-term employees in their  pension plans.
Some laws have exemptions for portions of certain industries or types of  employers that may disproportionately affect contingent workers. For  example, FLSA exempts all agricultural employers from the overtime pay  requirement and exempts agricultural employers who do not use more  than 500 days of labor in any calendar quarter from the minimum wage  requirement. These exemptions affect some categories of contingent  workers more than standard full-time workers because a greater  proportion of these contingent workers is in the agriculture industry; for  example, an estimated 11 percent of self-employed workers, 2 percent of  on-call workers and day laborers, 2 percent of independent contractors,  and 1 percent of direct-hire temporary workers are employed in  agriculture, compared with 1 percent of standard full-time workers.
Similarly, the nature of contingent work makes it difficult for some  contingent workers to meet state eligibility requirements for  unemployment insurance. Temporary and part-time workers may not meet  the minimum earnings requirements, which vary by state, and these  workers may have difficulty meeting the rules governing job loss because  they have less flexibility when the circumstances of their jobs change.
For example, temporary workers who choose this type of work in order to  meet family obligations or to attend school might be more likely to quit if  their employer changed the job location or required them to work different  hours. Nevertheless, they would be ineligible for unemployment insurance  benefits in many states because they voluntarily quit without good cause.  In addition, contingent workers can find it difficult to meet continuing  eligibility requirements.
Some contingent workers, such as temporary or contract workers, may  also find it difficult to meet the requirements of the National Labor  Relations Act (NLRA) for joining an existing bargaining unit or forming a  new bargaining unit. For example, under the act, temporary workers  wanting to join an existing collective bargaining unit at a work site must  first demonstrate that they have a “sufficient community of interest” with  the permanent workers in the bargaining unit. In 2004, the National Labor  Relations Board (NLRB) overturned a decision made in 2000, and required  consent from both the user and supplier employer before temporary  employees could join an existing bargaining unit. The 2004 decision made  it more difficult for temporary and leased employees to join unions and  bargain collectively. Contingent workers may also find it difficult to form  new collective bargaining units. For example, temporary workers and day  laborers may find it difficult to form bargaining units because they do not  work at one location or with one employer long enough to identify with a  particular group of workers and organize a union. In addition, some  worker advocacy groups maintain that contract company workers have  difficulty forming new collective bargaining units because employers that  use contract company workers may cancel contracts and contract with  other companies when workers attempt to unionize.
section_title: Incorrect Employment Relationship May Result in Lack of Worker Protections
paragraphs: In some cases it is difficult to determine which employer is responsible for  providing workers with workforce protections because some contingent  workers have more than one employer. In these cases, employers may be  (1) an intermediary, such as a temporary employment agency, contract  company, or leasing company; (2) the client firm that obtains the workers  through the intermediary; or (3) both the intermediary and the client firm.  Because it is often difficult in these cases to determine which employer is  liable to provide workers with workforce protections, litigation may be  necessary to resolve this issue.
Even in cases where there is only one employer involved, employers  sometimes classify workers improperly, primarily by designating some  workers as independent contractors when, in fact, they are more  appropriately considered employees. Moreover, employers have economic  incentives to misclassify employees as independent contractors because  employers are not obligated to make certain financial expenditures for  independent contractors that they make for employees, such as paying  certain taxes (Social Security, Medicare, and unemployment taxes),  providing workers’ compensation insurance, paying minimum wage and  overtime wages, or including independent contractors in employee benefit  plans.
In addition, the tests used to determine whether a worker is an  independent contractor or an employee are complex, subjective, and differ  from law to law. For example, the NLRA, the Civil Rights Act, FLSA, and  ERISA each use a different definition of an employee and various tests, or  criteria, to distinguish independent contractors from employees. (See  app. II for more information on employment relationship.)
section_title: DOL Detects and Addresses Employee Misclassification through Investigations, but Offices We Studied Vary in How Often They Forward Misclassification Cases to Other Federal and State Agencies
paragraphs: DOL detects and addresses employee misclassification when enforcing the  FLSA minimum wage and overtime pay provisions. As part of its FLSA  investigation process, DOL examines the employment relationship— whether a worker is an employee or an independent contractor—to  determine which workers are covered. Investigators use various methods  to test the employment relationship of workers, including interviewing  employers and workers, reviewing payroll and related documents, and  touring work sites. While misclassification alone is not an FLSA violation,  it may contribute to FLSA violations or violations of other laws, such as  tax violations. DOL’s outreach efforts provide some information to  employers and workers on employee misclassification issues. DOL  procedures require officials to share information with other federal and  state agencies whenever investigators find possible violations of other  laws. However, the district offices that we contacted vary in how often  they forward misclassification cases as a possible violation of other  agencies’ laws.
subsections: section_title: Investigators Determine Workers’ Employment Relationship
paragraphs: DOL relies on complaints as a primary way to identify potential violations  for investigation. All FLSA investigations of minimum wage and overtime  pay complaints begin with an examination of workers’ employment  relationship because FLSA applies only to employees, not to independent  contractors. If investigators determine that a worker is an employee and  not an independent contractor, they continue with their FLSA  investigation to determine whether the employer has provided the  minimum wage and overtime pay required by the act.
DOL’s Field Operations Handbook (FOH) provides investigators with  statutory interpretations and investigation procedures regarding the  employment relationship required for FLSA to apply. It also describes the  Supreme Court factors and explains how to apply them to test  employment relationship. For example, the Supreme Court factors address  whether the worker uses his or her own tools or equipment and whether  the worker can decide which hours to work. Appendix II contains more  information on the employment relationship. According to DOL officials,  investigators rely on their professional judgment when applying the  Supreme Court factors. Investigators receive classroom training and on- the-job mentoring on the Supreme Court factors and techniques for  applying the factors. In their training, they are taught to identify all the  relevant factors and make a full, balanced assessment of the facts of each  case.
Investigators may identify possible employee misclassification at different  points during the investigation. According to DOL officials,  misclassification issues may come up during the initial conference with  the employer or during an investigator’s review of records to determine  whether an employer had classified workers as employees or independent  contractors. At the initial conference with the employer, investigators ask  employers about the nature of their work, annual dollar volume of  business, the number of workers, and how workers are paid, and they  request payment documents, such as payroll records, time cards, and W-2  forms. While it is standard practice for investigators to review payroll and  other records related to wages and employment, investigators do not  necessarily review contracts or 1099 forms used to pay independent  contractors unless they have a reason to suspect possible  misclassification.
Investigators may have reason to suspect misclassification stemming from  the complaint that initiated the case or their knowledge of potential  misclassification in that industry. In these cases, the investigator would  ask employers about whether they contract any work and how they  classify their workers. For example, according to DOL officials, if an  investigator was conducting an investigation of a large drywall employer,  then the investigator would probably spend a large amount of time  pursuing independent contractor issues because misclassification has  been a problem in the past with construction contractors subcontracting  work to drywallers, roofers, electricians, and carpenters. In other cases  where the investigator has no knowledge about potential misclassification,  the employer’s responses at the initial conference may raise questions. For  example, if the employer had millions of dollars in annual business but  only two employees, then the investigator would likely ask further  questions about the employment relationship of any other workers. In  addition, DOL officials told us that investigators compare payroll records  with the work process identified by the employer to see if there are any  gaps. For example, investigators would need to follow up with employers  who describe work processes that required many workers but had no  employees listed on the payroll. Such a scenario could indicate that  employers had misclassified workers as independent contractors who  were not listed on the payroll.
Investigators may learn about employment relationship when interviewing  workers to verify the employer’s payroll and time records or to identify  workers’ duties in order to determine whether FLSA applies. According to  DOL officials, an investigator would not ask directly whether the worker is  an independent contractor or an employee; instead, an investigator would  ask questions to determine whether the worker is an employee or an  independent contractor. For example, an investigator would ask whether  workers set their own work hours or use their own equipment on the  job—indications that workers may be independent contractors, not  employees.
Investigators may obtain additional information on employment  relationship while touring an employer’s establishment. During a tour,  investigators can compare their observations about employment  relationship in the work environment to the information from the records  and interviews with employers and workers. Specifically, investigators can  observe control issues, such as whether workers are supervised and  provided with supplies and equipment. For example, if an apartment rental  complex treats its maintenance workers as independent contractors, then  the investigator would observe who provides the plumbing supplies and  paint—the employer or the workers—to help determine whether workers  are independent contractors or employees. Also, a tour can identify  potential misclassification issues for an investigator to follow up on. For  example, if the payroll records show that the employer has 10 employees  but the investigator sees 15 workers during the tour, then the investigator  will conduct further interviews and record review to determine whether  these other 5 workers are employees or independent contractors.
Because employee misclassification is not a violation of FLSA,  investigators are not required to discuss misclassification identified during  FLSA investigations with employers or to include it in their investigation  report. According to DOL officials, however, an investigator may discuss  misclassification with the employer during the investigation and may note  instances of misclassification in the investigation report. In discussing a  misclassification case with the employer, the investigator would explain  that the workers should be classified as employees, not independent  contractors, and that the employer may be violating other laws  administered by other agencies, such as tax laws or workers’  compensation laws. Specifically, investigators would explain to the  employer how they applied the Supreme Court factors in determining that  the workers were employees, not independent contractors. DOL officials  said that investigators would provide employers with publications and fact  sheets on employment relationship if they identified misclassification  during an investigation. In addition, the investigators may mention  employee misclassification in their final investigation report that  summarizes the facts of the investigation. According to DOL officials, if  the investigators included misclassification in the case report, it would be  mentioned as an underlying reason for a minimum wage or overtime  violation. However, investigation reports do not always include the reason  for the violation.
section_title: Employee Misclassification, though Not an FLSA Violation, May Contribute to FLSA or Other Violations
paragraphs: Employee misclassification alone is not a violation of FLSA, but may  contribute to FSLA minimum wage and overtime pay violations or  violations of tax, workers’ compensation, or unemployment insurance  laws. DOL investigations have identified FLSA violations associated with  employee misclassification. For example, one misclassification case  involved a valet parking company located in Arizona that provided  services to local restaurants, sports venues, hotels, and theaters. In 2004,  this company paid $66,947 in minimum wage and overtime pay back wages  to 262 employees who had been misclassified as independent contractors.  When reviewing the employment relationship, the DOL investigator found  that the services provided by these workers were integral to the business,  and that the employer had imposed strict policies and procedures to  follow and told them when they would work, where they would work,  what their pay rate would be, and what uniforms they would wear. The  investigator determined that the workers were not required to use  initiative, judgment, or foresight to be successful as independent  contractors; did not have any investment in facilities or equipment; and  were not operating to make a profit.
Another misclassification case involved a chicken-processing company  based in California that contracted out its deboning operations to a  subcontractor. In 2005, DOL investigators found that the subcontractor  had misclassified as independent contractors the employees he hired to  work at this deboning plant. The subcontractor violated FLSA when he  failed to meet payroll for 2 weeks, pay minimum wages and overtime pay,  and keep adequate payroll records. The subcontractor also illegally  deducted the cost of aprons, gloves, hair nets, and other required  equipment from workers’ paychecks. When the subcontractor went  bankrupt, the contractor agreed to cover the back wages due—$40,000  owed to 59 workers—although the contractor was not legally required to  do so.
DOL officials told us that their investigators have encountered cases  where employers classified workers as independent contractors instead of  employees to avoid paying proper wages under federal and state wage  laws or to avoid providing benefits under other laws, such as workers’  compensation and unemployment insurance laws. For example, in 2004, a  joint DOL-State of California investigation found that a services company  located in California had misclassified employees and not paid overtime in  accordance with FLSA. The affected workers provided janitorial services  to a major department store chain located in California, Arizona, Nevada,  Texas, and New Mexico. According to DOL officials, the company  contracted out the janitorial work to individuals who were not legitimate  contractors in that, among other things, they did not control the location  or hours of work. These “contractors” then hired others to do the janitorial  work. As a result of this arrangement, the services company avoided  paying minimum wage, overtime, and other benefits, such as workers’  compensation. In response to the investigation, the company agreed to pay  $1.9 million in back wages to 775 employees. Throughout the investigation,  DOL worked with the state to ensure compliance with state wage laws,  workers’ compensation programs, and unemployment insurance  programs.
section_title: DOL’s Outreach Efforts Provide Some Information on Employee Misclassification Issues
paragraphs: As part of general FLSA outreach efforts to employers and workers, DOL  provides some information on establishing the employment relationship.  While these outreach efforts primarily focus on how to comply with  provisions of FLSA—minimum wage, overtime pay, and child labor—they  also include some information on the employment relationship.
Specifically, information on employment relationship issues is available to  employers and workers through brochures, pamphlets, fact sheets, and  Web-based information. According to DOL officials, outreach efforts  conducted specifically for industries likely to use independent contractors  may also address the topic of employee misclassification.
The DOL Web site contains several sources of information on the FLSA  employment relationship. DOL’s Wage and Hour Division posts its  Employment Relationship under FLSA (WH Publication 1297) and fact  sheets that provide information on determining the employment  relationship in applying provisions of FLSA. For example, Fact Sheet 13:  Employment Relationship under the Fair Labor Standards Act (FLSA)  outlines the Supreme Court’s factors for determining an employment  relationship under FLSA and is available in several languages, including  Chinese, Korean, Spanish, Thai, and Vietnamese. It also identifies common  problems: (1) construction contractors hire so-called independent  contractors, who in reality should be considered employees because they  do not meet the Supreme Court tests for independence and (2) individuals  who work at home are often improperly considered independent  contractors. Another DOL Web site resource is Employment Laws  Assistance for Workers and Small Businesses (elaws) FLSA Advisor, an  interactive system that allows employers and workers to determine  whether a worker would be considered an employee or an independent  contractor. These Web site outreach sources contain contacts—such as  the Wage-Hour toll-free telephone line and links to district office  telephone numbers—to obtain additional information about employment  relationship issues.
Another form of outreach that DOL provides is its workplace poster. FLSA  regulations require that every employer that has employees subject to the  act’s provisions post a notice explaining the act in a prominent and  accessible place at the work site. While DOL relies heavily on complaints  from workers to enforce FLSA, the FLSA workplace poster does not  provide a telephone number for workers or others to call to register  complaints. Instead, the poster directs inquiries for additional information  to the nearest Wage and Hour Division office listed in the telephone  directory under “United States Government, Labor Department.” Also, the  FLSA workplace poster does not include any information on the  employment relationship. As a result, individuals seeking to report  possible employee misclassification complaints have no easy method to do  so.
DOL district offices conduct locally based general FLSA outreach efforts  for employer and worker groups that do not target employee  misclassification, but they provide some information on establishing the  employment relationship. DOL officials told us that they distribute  employment relationship publications and fact sheets to industries that  use independent contractors—such as the construction and garment  industries—and may be more likely to misclassify employees. According  to DOL officials, this outreach to industries using independent contractors  may also address the topic of employee misclassification. Also, in DOL’s  Western Region, a recent outreach effort to educate Hispanic employers  and workers about general workplace rights and responsibilities has  identified cases of employee misclassification from calls to a hotline.  Specifically, the Employment Education and Outreach (EMPLEO)—an  alliance of federal and state agencies, Mexican and Central American  consulates, and private nonprofit groups—provides a toll-free hotline  staffed by Spanish-speaking volunteers, not associated with the  government, who forward calls to the appropriate agency for response.
section_title: DOL Offices We Studied Vary in How Often They Forward Misclassification Cases to Other Federal and State Agencies
paragraphs: Employers’ misclassification of workers as independent contractors may  in some circumstances violate tax, unemployment insurance, and workers’  compensation laws. According to the Field Operations Handbook, DOL  regional or district officials are required to share information with other  appropriate federal and state agencies whenever investigators conducting  FLSA investigations find instances of possible violations of other laws. At  the same time, however, the FOH cautions investigators not to interpret  laws outside their authority. We discussed whether DOL forwards  misclassification cases identified during an FLSA investigation. The DOL  officials we spoke to in 9 district offices could not provide the number of  misclassification cases they referred to other agencies because they do not  track this information. However, their responses indicated that district  offices vary in how often they implement the procedures to refer cases to  other agencies. Some of the DOL district offices told us that they notified  IRS and state agencies when they found misclassification, while others  told us that they had little or no contact with other agencies regarding  misclassification issues. These district offices also reported that it was  rare for them to receive misclassification referrals from other federal or  state agencies.
DOL requires its regional or district officials to notify other agencies about  possible violations identified during DOL investigations. The procedures  state that investigators should note conditions that appear to be possible  violations of other federal or state laws or regulations. They also state that  for matters that are not within the authority of the Wage and Hour  Division, investigators should confine their investigative activities to  obvious conditions that they observe, or are brought to their attention, to  avoid any impression that the Wage and Hour Division is overstepping its  investigation authority. Further, the procedures instruct investigators not  to interpret any law other than those administered by the Wage and Hour  Division. They also direct investigators to report to district office  management any possible violations of other laws or regulations. The  Wage and Hour Division provides a form (WH-124) for regional or district  office officials to use to notify other federal or state agencies about  possible violations of laws or regulations administered by those agencies.
According to DOL officials, investigators do not have the authority or the  expertise to look for violations of other laws. DOL officials told us that  because investigators focus on identifying minimum wage, overtime pay,  and child labor violations during FLSA investigations, checking for  compliance with laws enforced by other agencies is not a priority. DOL  officials also noted that interagency collaboration on employee  misclassification referrals is difficult because different laws have different  tests of establishing the employment relationship.
The DOL district offices we contacted varied in how often they  implemented the procedures to refer possible violations, including  misclassification, to other federal or state agencies. According to the DOL  officials in these offices, in most cases, district offices are responsible for  contacting other agencies. While some districts told us that they notified  IRS and state agencies about misclassification cases, other districts told us  that they had no contact with states or other federal agencies about  misclassification issues. Some district officials told us that they notified  IRS when investigators found instances of misclassification that appeared  to involve tax law violations, but rarely received any response from IRS  after submitting their referral. Other districts told us that they had little  contact with IRS regarding misclassification. For example, one district  official said his district generally does not receive any feedback from IRS.  He said that his district would have more incentive to refer cases if IRS  would inform the district when it received DOL referrals and if the district  knew that IRS would act on the referrals.
Similarly, some DOL officials told us that their contact with state agencies  could include misclassification, while others said they had little contact  with states about these issues. For example, one regional official cited  coordination with the state agencies that are responsible for employment  tax and registration of contractors in the construction industry. He said  that this state agency imposes fines on individuals who are not registered  as contractors and that this sometimes involves misclassification.
District officials in the offices we contacted said they rarely receive  referrals about misclassification from other federal or state agencies.  While one district official said that other state agencies in the region refer  some complaints that occasionally include misclassification issues, most  officials said their districts have not received any misclassification  referrals from IRS or other federal or state agencies.
section_title: Conclusions
paragraphs: Contingent workers constitute an important and diverse sector of the U.S.  workforce. Yet while contingent work arrangements offer flexibility to  both employers and workers, they also provide contingent workers with  fewer workforce protections than are available to other workers.  Contingent workers also received fewer benefits. Many contingent  workers may not be covered under employer-sponsored health and benefit  plans and may not be able to afford these benefits on their own—a  situation that could have long-term adverse consequences for workers and  government programs. To the extent that contingent workers neither  receive health or pension benefits nor qualify for unemployment or  workers’ compensation, they may have to turn to needs-based programs,  such as Medicaid, to make ends meet. To the extent that this occurs, costs  formerly borne by employers may be shifted to federal and state public  assistance budgets. To help address the lack of health insurance coverage,  some state and professional associations have developed programs that  help contingent workers access health care. Although these initiatives are  relatively new and long-term outcomes have yet to be determined, they  may serve as promising practices for the future.
DOL investigators identify instances of employee misclassification when  responding to minimum wage and overtime pay complaints. However,  because the FLSA workplace poster does not provide an easy method for  workers to report complaints, DOL may be missing opportunities to  address other instances of potential misclassification. Improving the  workplace poster would reinforce DOL’s complaint-based strategy and  would help further protect the wages of employees who may be  misclassified.
While DOL investigators conducting FLSA investigations are required to  share information with other federal and state agencies whenever they  find instances of possible violations of other laws, DOL district offices we  studied varied in how often they forwarded misclassification cases to  other agencies. DOL does not know the extent to which district offices  refer misclassification cases to other agencies. DOL cautions investigators  not to interpret laws outside their authority, but referring misclassification  cases identified through FLSA investigations would not require DOL to  interpret other agencies’ laws. In addition, referring this information may  assist other federal and state agencies in addressing misclassification.  Furthermore, when DOL does not refer cases of misclassification, other  agencies lose opportunities to fulfill their fiduciary duties in conserving  government funds.
section_title: Recommendations for Executive Action
paragraphs: To facilitate the reporting of FLSA complaints, we recommend that the  Secretary of Labor instruct the Wage and Hour Division to revise the FLSA  workplace poster to include national, regional, and district office  telephone numbers and a Web site address that complainants may use to  report alleged employee misclassification issues.
To facilitate addressing employee misclassification across federal and  state programs, we recommend that the Secretary of Labor instruct the  Wage and Hour Division to evaluate the extent to which misclassification  cases identified through FLSA investigations are referred to the  appropriate federal or state agency potentially affected by employee  misclassification, and take action to make improvements as necessary. In  addressing its referral mechanism, the Wage and Hour Division officials  should consider building upon efforts by district offices currently engaging  in referrals.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOL for comment. Overall, DOL  agreed with the first recommendation and agreed with the primary part of  the second recommendation, but disagreed with one part of this  recommendation. DOL’s written comments are reproduced in appendix V.
DOL’s ESA agreed with the first recommendation on revising the  workplace poster to provide additional contact information to facilitate  the reporting of possible misclassification complaints. ESA noted that the  Wage and Hour Division is in the process of revising its workplace poster  to add the division’s toll-free phone number.
Regarding the second recommendation, on referring misclassification  cases to other agencies, DOL agreed with the value of sharing potential  employee misclassification with appropriate federal and state programs.  The agency commented that the Wage and Hour Division will review its  processes to determine the appropriateness of referral of such cases to  other agencies. However, DOL did not agree with a part of the draft  recommendation that referral of cases should include notifying the  employer that the misclassification case has been forwarded to the  appropriate agency. The agency stated that such notification could place  the Wage and Hour Division staff in the untenable position of having to  defend a referral based upon interpretations of laws, which the division  staff has no expertise or authority to interpret or enforce. After  considering DOL’s position concerning this aspect of the draft  recommendation, we deleted this part from the final recommendation.
DOL’s BLS also provided technical comments, which we incorporated in  the report as appropriate.
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section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of our study were to determine (1) the size and nature of  the contingent workforce, (2) the benefits and workforce protections  provided to contingent workers, and (3) the actions that the Department  of Labor (DOL) takes to detect and address employee misclassification.
To obtain information on the contingent workforce, we analyzed data from  the Bureau of Labor Statistics (BLS). Specifically, we reviewed BLS’s  Current Population Survey (CPS), which is used to survey people about  their work and benefits, and a CPS supplement that BLS developed to  collect information on the contingent workforce. We defined “contingent  workers” according to the methodology used in our 2000 review of the  contingent workforce, examining eight categories of workers who could  be considered contingent: agency temporary workers (temps), direct-hire  temps, on-call workers, day laborers, contract company workers,  independent contractors, self-employed workers, and standard part-time  workers. Standard full-time workers were defined as all workers who do  not fall into one of the contingent worker categories. We reported  descriptive statistics on the characteristics of contingent workers and  standard full-time workers, their receipt of health insurance, and their  participation in pension plans. We did not conduct multivariate analyses to  determine the causal relationships explaining contingent workers’  incidence of low family income, receipt of health insurance, or  participation in pension plans. We also interviewed BLS officials and other  researchers about contingent worker issues.
To estimate the size of the contingent workforce and describe how it has  changed over the past decade, we used data collected in the CPS as well as  data collected in a special supplement to the survey—the Contingent Work  Supplement—in February 1995, 1999, and 2005. To describe the  demographic characteristics of the contingent workforce and the extent to  which these workers have access to health insurance and pension  benefits, we used data collected in the CPS and the Contingent Work  Supplement in February 2005.
The CPS is designed and administered jointly by the Bureau of the Census  (Census) and BLS. It is the source of official government statistics on  employment and unemployment in the United States. The survey is used to  collect information on employment as well as such demographic  information as age, sex, race, marital status, educational attainment, and  family structure. The survey is based on a sample of the civilian,  noninstitutionalized population of the United States. Using a multistage  stratified sample design, about 60,000 households are selected on the basis  of area of residence to be representative of the country as a whole and of  individual states. A more complete description of the survey, including  sample design, estimation, and other methodology, can be found in the  CPS documentation prepared by Census and BLS.
The Contingent Work Supplement was designed by BLS to obtain  information from workers on whether they hold contingent jobs, defined  by BLS as jobs that are expected to last only a limited period of time. In  addition, information is collected on several alternative employment  relationships, namely working as independent contractors and on call, as  well as working through temporary help agencies or contract firms. All  employed persons except unpaid family members are included in the  supplement. For persons holding more than one job, the questions refer to  the characteristics of their main job—the job in which they work the most  hours. Similar surveys have been conducted in February of 1995, 1997,  1999, 2001, and 2005. For a more complete description of the supplement  see the technical documentation prepared by Census and BLS.
For our data reliability assessment, we reviewed agency documents on the  CPS and conducted electronic tests of the files. On the basis of these  reviews, we determined the required data elements from the CPS were  sufficiently reliable for our purposes.
Because the CPS is a probability sample of the population based on  random selection, the sample is only one of a large number of samples that  might have been drawn. Since each sample could have provided different  estimates, confidence in the precision of the particular sample’s results is  expressed as a 95 percent confidence interval (for example, +/- 4  percentage points). This is the interval that would contain the actual  population value for 95 percent of the samples that could have been  drawn. As a result, we are 95 percent confident that each of the confidence  intervals in this report will include the true values in the study population.
For the CPS estimates in this report, we use the CPS general variance  methodology to estimate the sampling error and report it as confidence  intervals. Percentage estimates based on the total workforce have   95 percent confidence intervals of within +/- 1 percentage point of the  estimate itself, unless otherwise noted. Percentage estimates for  individual categories of contingent workers have confidence intervals of  within +/- 10 percentage points of the estimate unless otherwise noted.  Estimates of totals exceeding 1 million workers have 95 percent  confidence intervals of within +/- 10 percent of the estimate itself unless  otherwise noted. Estimates of totals exceeding 400,000 workers have   95 percent confidence intervals of within +/- 20 percent of the estimate  itself unless otherwise noted. The 95 percent confidence intervals for  other estimates are presented with the estimates themselves in the body of  the report. Consistent with CPS documentation guidelines, we do not  produce estimates from the February 2005 supplement for populations of  less than 75,000.
In addition to the reported sampling errors, the practical difficulties of  conducting any survey may introduce other types of errors, commonly  referred to as nonsampling errors. For example, differences in how a  particular question is interpreted, the sources of information available to  respondents, or the types of people who do not respond can introduce  unwanted variability into the survey results. For the CPS, data are often  collected from one household member for all household members.  Nonsampling error could occur if a proxy responder was unable to provide  correct pension or insurance information for household members not at  home at the time of the interview.
Although we used data from the Contingent Work Supplement, we used a  definition of contingent worker different from the one used by BLS in its  analysis of the data. As in our 2000 review of contingent workers, we did  not restrict our definition to include only workers with relatively short job  tenure, but rather provided information on a range of workers who could  be considered contingent under different definitions. Although we believe  that it is useful to consider the nature and size of the population of  workers in jobs of limited duration as well as their access to benefits, we  also believe that it is useful to provide information according to categories  that are more readily identifiable and mutually exclusive. The categories  we used to define the contingent workforce included direct-hire  temporaries (workers hired directly by employers to work in temporary  jobs), even though the Contingent Work Supplement did not contain a  question that directly asked for this information. We also combined on- call workers and day laborers because the definitions and characteristics  of these workers are similar and the number of day laborers alone was not  large enough to be statistically significant. Information on leased workers  was not included in our 2000 review of contingent workers because of a  lack of data on these workers. For this reason, leased workers were not  included in the definition of the contingent workforce used in this report.
To obtain information about the workforce protections that are offered to  contingent workers, we reviewed key workforce protection laws, related  court cases, and other studies on contingent workers.
To obtain information on DOL’s actions to detect and address employee  misclassification as part of FLSA enforcement, we reviewed FLSA and its  corresponding regulations. We also reviewed DOL documents related to  FLSA, including policies and procedures on conducting investigations,  information on investigator training, and outreach efforts. We interviewed  officials from the Wage and Hour Division headquarters office, 3 of the   5 regional offices, and 9 of the 51 district offices—3 district offices in each  region. We selected a nonprobability sample of district and regional offices  to target offices located in large cities and that provided geographic  coverage across each region. Because this was not a probability sample,  we did not generalize the results of our regional and district interviews to  the regions and districts we did not contact. In each office, we interviewed  regional and district management-level officials using a standard set of  questions in order to obtain information related to employee  misclassification as part of FLSA enforcement. The interview questions  asked about (1) the extent and source of employee misclassification,   (2) investigations related to employee misclassification, and (3) training  and outreach efforts related to employee misclassification. We contacted  the following offices:      New York City District Office    Richmond District Office    Southern New Jersey District Office    Columbus District Office    Detroit District Office    Springfield District Office    East Los Angeles District Office     Phoenix District Office    Seattle District Office  In addition, we reviewed literature and interviewed researchers from four  academic institutions and two nonprofit groups about employee  misclassification issues.
We performed our work in accordance with generally accepted  government auditing standards between July 2005 and June 2006.
section_title: Appendix II: Establishing the Employment Relationship of Workers
paragraphs: Establishing the employment relationship of workers under the Fair Labor  Standards Act (FLSA) and the Employee Retirement Income Security Act  (ERISA) can be complex and may result in litigation. FLSA requires that an  employer-employee relationship exist for a worker to be covered by the  act’s provisions. FLSA—which provides minimum wage and overtime pay  protections—requires that employers pay those employees covered by the  act at least the minimum wage and pay overtime wages when they work  more than 40 hours a week. The act defines “employee” broadly as an  individual employed by an employer. The U.S. Supreme Court has  identified certain factors that should be considered in determining  whether a worker is an employee or an independent contractor under  FLSA. In general, a worker who meets the FLSA definition of employee is  one who is economically dependent on the business he or she serves. In  contrast, an independent contractor is one who is engaged in a business of  his or her own. The test used to determine whether an employment  relationship exists for FLSA purposes is referred to as the economic  realities test. The court has indicated that in applying this economic  realities test under FLSA, such determinations must consider the  circumstances of the whole activity and cannot be based on isolated  factors or a single characteristic. In enforcing FLSA, DOL uses the  following factors:      The extent to which the worker’s services are an integral  part of the employer’s business    Examples: Does the worker play an integral role in the  business by performing the primary type of work that  the employer performs for their customers? Does the  worker perform a discrete job that is one part of the  business’ overall process of production? Does the  worker supervise any of the company’s employees?
The permanency of the relationship    Example: How long has the worker worked for the same  company?
The amount of the worker’s investment in facilities and    Examples: Is the worker reimbursed for any purchases,  materials, or supplies? Does the worker use his or her  own tools or equipment?
The nature and degree of control by the employer    Examples: Who decides on what hours to be worked?
Who is responsible for quality control? Does the worker  work for any other company(s)? Who sets the pay rate?
The worker’s opportunities for profit and loss    Examples: Did the worker make any investments such  as insurance or bonding? Can the worker earn a profit  by performing the job more efficiently or exercising  managerial skill or suffer a loss of capital investment?
The amount of initiative, judgment, or foresight in open  market competition with others required for the success  of the claimed independent contractor    Examples: Does the worker perform routine tasks  requiring little training? Does the worker advertise  independently through the Yellow Pages or business  cards? Does the worker have a separate business site?
In some cases, employers misclassify workers as independent contractors  when they should be classified as employees. Under FLSA, the courts have  examined the issue of misclassification by applying the economic realities  test and making case-by-case determinations as to whether the workers  are employees and thereby covered by the act. For example, a federal  district court recently determined that over 500 delivery workers for  supermarket and drugstore chains had been misclassified as independent  contractors. The court ruled that the companies that had hired these  workers to make deliveries controlled their placement and pay, provided  them with delivery carts to rent and uniforms to purchase, required little  skill to perform the job, and that the work performed constituted an  integral part of the companies’ business. Therefore, the court ruled that  they were employees and entitled to overtime wages under FLSA. In  another case, DOL brought suit on behalf of cable installers against cable  television providers and cable installation companies for overtime  compensation under FLSA. In this case, the court ruled that the employer  did not exhibit the type of control needed to characterize the relationship  as employee-employer, that the workers provided their own van and other  equipment, and that the job required skilled labor. On the basis of these  factors, the court denied the claim and held that the cable installers were  properly classified as independent contractors and not entitled to  protection under FLSA.
The complexity of issues involving joint employment and misclassification  of employees is illustrated by litigation involving the Microsoft  Corporation. In the late 1980s, Microsoft began to hire what the company  classified as independent contractors to fill many of its full-time  employment vacancies. After the Internal Revenue Service (IRS)  determined that these workers were common law employees in 1989 and  1990, Microsoft terminated the employment relationship, set up an  employment agency, and converted these workers into temporary agency  employees. The workers sued Microsoft, and in 1996 the court ruled that  they were employees of the company rather than independent contractors  or temporary agency employees. The court then considered whether or  not the employees were eligible for the employer’s saving and stock  purchase plan benefits under ERISA. The determining factor was the  language included in Microsoft’s plan, which expressly made any common  law employee on the U.S. payroll eligible for benefits. However, while the  court determined that the workers were common law employees, it  directed Microsoft to determine what rights these workers, as common  law employees, had under Microsoft’s ERISA plan. Eventually the parties  entered into a settlement agreement in which Microsoft paid $96.9 million.
Other cases have held that although workers may have been misclassified,  they still did not qualify for benefits under ERISA plans because they did  not qualify under the language of the plan that excluded certain types of  employees, such as temporary or leased employees. Some employers  amended their ERISA plans in response to the Microsoft decision to limit  participation to workers that the employers classified as employees,  whether or not the excluded workers may later be determined to be  employees by the IRS or courts. The IRS has approved the use of such  language in ERISA plans.
section_title: Appendix III: Size and Characteristics of the Contingent Workforce
paragraphs: This table provides the following information on contingent workers:  growth rates (percentage changes) and changes in the share of the total  workforce (percentage point changes) for 1995-1999, 1999-2005, and 1995- 2005.
section_title: Appendix IV: Key Laws Designed to Protect Workers
paragraphs: This appendix provides a more detailed description of the key laws  designed for workers’ protection and their applicability to members of the  contingent workforce. By definition, these laws apply only to employees— independent contractors and self-employed workers are not covered.  However, no definitive test exists to distinguish whether a worker is an  employee or an independent contractor. In determining whether an  employment relationship exists under federal statutes, courts have  developed several criteria. These criteria have been classified as the  economic realities test, the common law test, and a combination of the  two sometimes referred to as a hybrid test.
The economic realities test looks to whether the worker is economically  dependent upon the principal or is in business for himself. The test is not  precise, leaving determinations to be made on a case-by-case basis. The  test consists of a number of factors, such as the degree of control  exercised by the employing party over the worker, the worker’s  opportunity for profit or loss, the worker’s capital investment in the  business, the degree of skill required for the job, and whether the worker  is an integral part of the business.
The traditional common law test examines the employing party’s right to  control how the work is performed. To determine whether the employing  party has this right, courts may consider the degree of skill required to  perform the work, who supplies the tools and equipment needed to  perform the work, and the length of time the worker has been working for  the employing party.
When the tests are combined in some type of hybrid, a court typically  weighs the common law factors and some additional factors related to the  worker’s economic situation, such as how the work relationship may be  terminated, whether the worker receives leave and retirement benefits,  and whether the hiring party pays Social Security taxes.
Each of the laws is discussed in more detail below, including the tests  used under each to determine whether a worker is an employee or an  independent contractor.
subsections: section_title: Family and Medical Leave Act of 1993 (29 U.S.C. 2601)
paragraphs: The Family and Medical Leave Act of 1993 provides various protections for  employees who need time off from their jobs because of medical problems  or the birth or adoption of a child. The act requires employers to allow  employees to take up to 12 weeks of unpaid leave for medical reasons  related to the employee or a family member or to care for a newborn or  newly adopted child without reduction of pay or benefits when he or she  returns to work. It also requires employers to maintain the same health  care coverage for employees while they are on leave that was provided  when they were actively employed. To be eligible for this coverage,  employees must have been employed for 12 months by an employer that  employs 50 or more employees who work 20 or more calendar weeks in a  year and must have worked at least 1,250 hours during the past 12 months.
To determine whether a worker is a covered employee under the law, the  courts have applied the economic realities test.
section_title: Employee Retirement Income Security Act (29 U.S.C. 1001)
paragraphs: The Employee Retirement Income Security Act establishes uniform  standards for employee pension and welfare benefit plans, including  minimum participation, accrual, and vesting requirements; fiduciary  responsibilities; and reporting and disclosure requirements. The act does  not require employers to provide pension or welfare benefits to  employees; it applies to any employer or employee organization engaged  in commerce or any industry affecting commerce that maintains a covered  employee benefit plan.
Contingent workers are covered by the act only if the employer allows  them to participate in a pension or welfare benefit plan. Which employees  are included in a plan depends on how the plan documents are drafted and  interpreted. If an employer wishes to exclude some or all types of  contingent workers from participating in a plan, the employer must clearly  define the excluded groups of workers, and that definition must be  properly applied. Otherwise, contingent workers whom the employer  intended to exclude may be covered.
To determine whether a worker is a covered employee under the law, the  courts have applied the common law test.
section_title: Fair Labor Standards Act (29 U.S.C. 201)
paragraphs: The Fair Labor Standards Act establishes minimum wage, overtime, and  child labor standards for employees. The act covers all employees of  employers engaged in commerce or the production of goods that meet a  dollar-volume-of-business requirement. The act also covers all employees  engaged in commerce or the production of goods for commerce; all  employees engaged in domestic service covered by the law; all employees  of a hospital, residential care institution, or school; and all federal, state,  and local government employees.
To determine whether a worker is a covered employee under the law, the  courts have applied the economic realities test.
section_title: National Labor Relations Act (29 U.S.C. 151)
paragraphs: The National Labor Relations Act guarantees the right of employees to  organize and bargain collectively. The act applies to all employers and  employees in their relationships with labor organizations whose activities  affect interstate commerce. The act does not differentiate by firm size.
The coverage issue regarding temporary workers is whether they have a  right to join the same bargaining units as permanent employees with  whom they work. Generally, agency temps who work at one site on a fairly  regular basis over a sufficient period of time can join the existing  collective bargaining unit of permanent employees if the agency (or  agencies, if more than one is involved) and the employer that hired the  workers from the agency consent to this arrangement. However,  temporary workers often do not work at one work site long enough to  have an interest in joining a union.
To determine whether a worker is a covered employee under the law, the  courts have applied the common law test.
section_title: Unemployment Insurance
paragraphs: The unemployment insurance system is a joint federal-state system funded  by both federal and state payroll taxes. It was established by the Social  Security Act of 1935 and was intended to provide temporary relief through  partial wage replacement for workers who lose jobs for economic reasons,  such as layoffs, and to help stabilize the economy during recessions. The  system pays benefits to workers who become unemployed and meet state- established eligibility rules. To determine whether a worker is a covered  employee under the law, most states use a different type of test than is  used for other laws. This test is called the ABC test: workers are  considered employees unless (a) they are free from direction and control  over performance of the work; (b) the service is performed either outside  the usual course of the business for which it is performed or is performed  outside of all places of business of the enterprise for which it is performed;  and (c) the individual is customarily engaged in an independent trade,  occupation, profession, or business.
section_title: Workers’ Compensation
paragraphs: State and federal workers’ compensation programs provide benefits for  wage loss and medical care to injured workers and, in some cases, their  families. At the same time, employers’ liabilities are limited strictly to  workers’ compensation payments. Benefits paid depend on the nature and  extent of the injuries and the ability of injured workers to continue  working. For employees whose injuries are not serious, the only benefits  received are of a medical nature. Employees with more serious injuries or  illnesses may also be entitled to wage-loss benefits; vocational  rehabilitation benefits; and schedule payments for the permanent loss, or  loss of use of, parts or functions of the body. In addition, survivors of an  employee may receive death benefits if the employee’s death resulted from  a job-related injury or illness. To determine whether a worker is a covered  employee under the law, most states use the common law test.
section_title: Occupational Safety and Health Act (29 U.S.C. 651)
paragraphs: The Occupational Safety and Health Act requires employers to maintain a  safe and healthful workplace and provides employees with certain rights  and responsibilities. Courts use either the economic realities test or the  common law test to determine whether someone is an employee under the  act. According to the law, the party responsible for ensuring safety is the  employer that is in direct control of the workplace and the actions of those  who work there, including contingent workers such as agency temps and  contract company workers who are supplied by another party. Thus, if an  accident occurs at the workplace, the employer that created the hazard,  not the temporary help firm or contract company, is responsible.
section_title: Title VII of the Civil Rights Act (42 U.S.C. 2000e), the Americans with Disabilities Act (42 U.S.C. 12101), and the Age Discrimination in Employment Act (29 U.S.C. 621)
paragraphs: Title VII of the Civil Rights Act, the Americans with Disabilities Act, and  the Age Discrimination in Employment Act protect all employees and job  applicants from various forms of discrimination, such as discrimination  based on race, national origin, gender, disability, or age. The Civil Rights  Act and the Americans with Disabilities Act apply to employers that have  15 or more employees for each of 20 or more calendar weeks in a year.  The Age Discrimination in Employment Act applies to employers that have  20 or more employees for each working day in each of 20 or more calendar  weeks.
Further, each of these laws explicitly covers temporary employment  agencies. Title VII of the Civil Rights Act explicitly prohibits employment  agencies from discriminating on the basis of race, color, religion, gender,  or national origin in classifying or referring people for employment. The  Americans with Disabilities Act explicitly includes employment agencies  in the definition of entities covered by the law. The Age Discrimination in  Employment Act explicitly prohibits employment agencies from  discriminating on the basis of a person’s age (if over 40) in classifying or  referring a person for employment.
To determine whether a worker is a covered employee under federal  antidiscrimination statutes, the courts have used all three tests—the  common law test, the economic realities test, and the hybrid test.  Independent contractors receive some protection from discrimination.  Under a provision of the Civil Rights Act that protects contractual rights,  independent contractors are protected against racial discrimination in  both the termination of a contract and the creation of a hostile work  environment. In joint employment situations, one employer may be liable  for the discriminatory acts of the other employer if the employer that is  being held liable controls some substantial aspect of the employee’s  compensation or terms and conditions of employment.
section_title: Consolidated Omnibus Budget Reconciliation Act (29 U.S.C. 1161)
paragraphs: Continuation of group health plan coverage is generally required under  this act for employees who otherwise would lose coverage as a result of  certain events, such as being laid off by their employers. Individuals may  continue coverage under their former employers’ group health plans at  their own expense. Depending on the qualifying event, the duration of  required coverage ranges from 18 to 36 months. In general, when a  covered employee experiences termination or reduction in hours of  employment, the continued coverage of the employee and the employee’s  spouse and dependents must continue for 18 months. The act applies to all  group health plans, except those maintained by employers with fewer than  20 employees. Workers who were considered employees under the group  health plans are also employees for purposes of this act.
section_title: Health Insurance Portability and Accountability Act of 1996 (Pub. L. No. 104-191)
paragraphs: This act guarantees the availability and renewability of health insurance  coverage for certain individuals. It limits, and in most cases eliminates, the  waiting time before a plan covers a preexisting condition for group health  plan participants and beneficiaries who move from one job to another and  from employment to unemployment. The act also creates federal  standards for insurers, health maintenance organizations, and employer  plans, including employers who self-insure. The act does not require  employers to offer health insurance to its employees or, if they offer health  insurance, to cover part-time, seasonal, or temporary employees. The act  increases the tax deduction for health insurance for self-employed  workers, including independent contractors, to 100 percent of premiums  and provides new tax incentives to encourage individuals and employers  to purchase long-term-care insurance.
section_title: Appendix V: Comments from the Department of Labor
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
paragraphs: Robert E. Robertson, (202) 512-7215 or robertsonr@gao.gov.
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Brett S. Fallavollita,   Linda L. Siegel, Janice L. Peterson, and Jason R. Campbell contributed  significantly to all aspects of this report. Daniel A. Schwimer reviewed the  coverage of contingent workers under laws designed to protect workers;  Richard P. Burkard provided legal support; Paula J. Bonin,   Evan B. Gilman, Mark F. Ramage, and Joan K. Vogel assisted in analyzing  the BLS data; Thomas D. Short assisted with IRS issues; and   Jonathan S. McMurray assisted in report development.
section_title: Related GAO Products
paragraphs: Department of Labor, Wage and Hour Division: Defining and  Delimiting the Exemptions for Executive, Administrative, Professional,  Outside Sales, and Computer Employees. GAO-04-735R. Washington,  D.C.: May 5, 2004.
Worker Protection: Labor’s Efforts to Enforce Protections for Day  Laborers Could Benefit from Better Data and Guidance. GAO-02-925.  Washington, D.C.: September 26, 2002.
Private Pensions: Improving Worker Coverage and Benefits. GAO-02-225.  Washington, D.C.: April 9, 2002.
Health Insurance: Proposals for Expanding Private and Public  Coverage. GAO-01-481T. Washington, D.C.: March 15, 2001.
Health Insurance: Characteristics and Trends in the Uninsured  Population. GAO-01-507T. Washington, D.C.: March 13, 2001.
Pension Plans: Characteristics of Persons in the Labor Force without  Pension Coverage. GAO/HEHS-00-131. Washington, D.C.: August 22, 2000.
Contingent Workers: Incomes and Benefits Lag Behind Those of Rest of  Workforce. GAO/HEHS-00-76. Washington, D.C.: June 30, 2000.
Fair Labor Standards Act: White-Collar Exemptions Need Adjustments  for Today’s Work Place. GAO/T-HEHS-00-105. Washington, D.C.: May 3,  2000.
Fair Labor Standards Act: White Collar Exemptions in the Modern Work  Place. GAO/HEHS-99-164. Washington, D.C.: September 30, 1999.
Employment-Based Health Insurance: Medium and Large Employers  Can Purchase Coverage, but Some Workers Are Not Eligible.   GAO/HEHS-98-184. Washington, D.C.: July 27, 1998.
Private Health Insurance: Continued Erosion of Coverage Linked to Cost  Pressures. GAO/HEHS-97-122. Washington, D.C.: July 24, 1997.
Tax Administration: Issues in Classifying Workers as Employees or  Independent Contractors. GAO/T-GGD-96-130. Washington, D.C.: June 20,  1996.
Tax Administration: Issues Involving Worker Classification.   GAO/T-GGD-95-224. Washington, D.C.: August 2, 1995.
Tax Administration: Estimates of the Tax Gap for Service Providers.  GAO/GGD-95-59. Washington, D.C.: December 28, 1994.
Tax Administration: Improving Independent Contractor Compliance  with Tax Laws. T-GGD-94-194. Washington, D.C.: August 4, 1994.
Tax Administration: Approaches for Improving Independent Contractor  Compliance. GGD-92-108. Washington, D.C.: July 23, 1992.
Workers at Risk: Increased Numbers in Contingent Employment Lack  Insurance, Other Benefits. GAO/HRD-91-56. Washington, D.C.: March 8,  1991.
Tax Administration: Information Returns Can Be Used to Identify  Employers Who Misclassify Workers. GAO/GGD-89-107. Washington, D.C.:  September 25, 1989.