Concerns arise when employers misclassify workers as independent  contractors, who are excluded from certain worker protections. Number and Characteristics of Independent Contractors

In 2005, an estimated 7.4 percent of the total employed workforce were  independent contractors. By comparison, 6.7 percent of the workforce  were independent contractors in 1995. During this time period, the number  of independent contractors grew from an estimated 8.3 million to 10.3  million workers in 2005. Independent contractors, in 2005, were on average 46 years old. Independent contractors were  employed in a wide range of industries, but in 2005, 23 percent were  employed in professional services and 22 percent were employed in  construction. Misclassification of Employees Can Have Negative Outcomes for Workers and Government Programs

The tests used to determine whether a worker is an independent  contractor or an employee are complex, subjective, and differ from law to  law. Nevertheless, when employees are misclassified as independent  contractors, they may be excluded from coverage under key laws designed  to protect workers and may not have access to certain employer-provided  benefits, such as health insurance coverage and pension plans. For example, misclassification could affect  payment of taxes and payments into state workers’ compensation and  unemployment insurance programs. Some of the key laws designed to protect workers but that only apply to  “employees” include the following:    Fair Labor Standards Act—establishes minimum wage, overtime,  and child labor standards;    Family and Medical Leave Act—requires employers to allow  employees to take up to 12 weeks of unpaid, job-protected leave for  medical reasons related to a family member’s or the employee’s  own health;    Occupational Safety and Health Act—requires employers to  maintain a safe and healthy workplace for their employees and  requires employers and employees to comply with all federal  occupational health and safety standards;    National Labor Relations Act—guarantees the right of employees to  organize and bargain collectively;    Unemployment Insurance—pays benefits to workers in covered  jobs who become unemployed and meet state-established eligibility  rules; and    Workers’ Compensation—provides benefits to injured workers  while limiting employers’ liability strictly to workers’ compensation  payments. Employee Misclassification Can Affect Administration of Government Programs

Misclassification of employees can affect the administration of many  federal and state programs, such as payment of taxes and pension  benefits. 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

DOL detects and addresses employee misclassification when enforcing the  FLSA minimum wage and overtime pay provisions. 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. Another form of outreach that DOL provides is its workplace poster.
Why GAO Did This Study

Some workers do not receive worker protections to which they are entitled because employers misclassify them as independent contractors when they should be classified as employees. Key worker protections include minimum hourly wage and overtime pay and access to unemployment insurance. The Department of Labor (DOL) enforces several labor laws to protect workers, including the Fair Labor Standards Act (FLSA). Misclassification can also have a negative impact on tax collection for Social Security, unemployment insurance, and other programs. This testimony draws upon a previous GAO report and focuses specifically on (1) the number and characteristics of independent contractors, (2) the workforce protections and benefits provided to employees that typically are not available to independent contractors, and (3) the actions that DOL takes to detect and address employee misclassification.

What GAO Found

The number of independent contractors in the total employed workforce grew from 6.7 percent in 1995 to 7.4 percent in 2005. In 2005, there were 10.3 million independent contractors. Independent contractors, in 2005, had an average age of 46 years, were almost twice as likely to be male than female, and almost two-thirds had some college or higher education. Independent contractors were employed in a wide range of industries (such as professional services and construction) and occupations (including sales and management). When employees are misclassified as independent contractors, they may be excluded from coverage under key laws designed to protect workers and may not have access to employer-provided health insurance coverage and pension plans. Moreover, misclassification of employees can affect the administration of many federal and state programs, such as payment of taxes and payments into state workers' compensation and unemployment insurance programs. Notably, the tests used to determine whether a worker is an independent contractor or an employee are complex, subjective, and differ from law to law. DOL detects and addresses misclassification of employees as independent contractors by investigating complaints, but does not always forward misclassification cases to other federal and state agencies. DOL investigators detect and address employee misclassification primarily when responding to FLSA minimum wage and overtime pay complaints. 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 GAO contacted vary in how often they forward misclassification as a possible violation of other laws. As one form of outreach to workers, DOL has an FLSA workplace poster that explains the act, but it is missing key contact information.