On June 1, 2016, the US Department of Labor (US DOL) announced that it has entered into a memorandum of understanding (MOU) with South Dakota to share information and coordinate enforcement efforts as they pertain to an employer's incorrect treatment of employees as independent contractors. South Dakota is now one of 29 states that have agreed to share worker misclassification information with US DOL.

Purpose of the federal-state labor department MOU

The focus of this MOU is to share information that may be useful in collectively identifying workers who have been denied access to such benefits and protections as family and medical leave, overtime, minimum wage, workers' compensation insurance and unemployment insurance.

Also of interest are governmental revenues lost due to the failure to withhold and/or pay Social Security, Medicare, unemployment insurance or other similar employment taxes as a result of the worker misclassification.

Information sharing

To the extent practicable and allowed by law and policy, US DOL and the respective state agencies agree to:

— Exchange information on laws and regulations of common concern to the agencies
— Establish a methodology for exchanging investigative leads, complaints and referrals of possible violations
— Exchange information (statistical data) on the incidence of violations in specific industries and geographic areas

When appropriate and to the extent allowable under law, US DOL and the respective state agencies may:

— Conduct joint investigations in the state
— Coordinate their respective enforcement activities and assist each other with enforcement
— Make referrals of potential violations of each other's statutes

States participating in MOU with the US Department of Labor (as of July 7, 2016)

Alabama
Alaska
Arkansas
Colorado
Connecticut
Florida
Hawaii
Idaho
Illinois
Kentucky
Louisiana
Maryland
Massachusetts
Minnesota
Missouri
Montana
New Hampshire
New Mexico
New York
Oregon
Rhode Island
South Dakota
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Wyoming

Ernst & Young LLP insights

Worker classification is a complex and increasingly important consideration, with potential risks in the areas of wage and hour compliance, workers' compensation and unemployment insurance.

While determining a worker's proper classification for each jurisdiction is not always straightforward, the consequences of misclassifying workers can be significant. For example, an employer that is found to have misclassified its workers is liable for 100% of the income tax it failed to withhold.

The Affordable Care Act's employer provisions have also drawn focus on worker classification since its provisions extend to employees but not to independent contractors.

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