By David G. Seely

The Kansas Legislature has joined the U.S. Department of Labor and the Internal Revenue Service in stepping up efforts to address the misclassification of employees as independent contractors. Substitute House Bill 2135, which was signed into law by Governor Sam Brownback on Thursday, May 12, 2011, empowers the Kansas Department of Revenue to investigate and refer to the Kansas Secretary of Labor, instances of suspected misclassification, and directs the Secretary of Labor or his/her designee to make a determination of whether a worker has been properly classified, for purposes of wages and unemployment under the Kansas Employment Security Law.

The Secretary’s determination must be based on an examination of “the totality of the circumstances in which the individual renders service.” If the Secretary finds that a business had a “reasonable basis” for its classification of the employee, the classification “shall be deemed valid,” except that services “shall be deemed to be employment . . . if the business for which activities of the individual are performed retains not only the right to control the end results and the manner and means by which the end result is accomplished.”

A “reasonable basis” is defined to include reasonable reliance on: (1) a judicial decision; (2) a ruling from the Internal Revenue Service, the Kansas Department of Revenue, or the Kansas Department of Labor; (3) a prior audit by any of those agencies which did not result in a reclassification of workers similarly situated; or (4) application of worker classifications customary among a significant segment of its industry. However, in order to have a reasonable basis, the business must also demonstrate consistency in its practice of classifying workers and in reporting wages or payments to the taxing authorities. If a reasonable basis exists, the Secretary is precluded from imposing penalties or interest, or seeking recovery of back taxes.

If a reasonable basis cannot be ascertained, the new law then directs the Secretary to consider a list of 8 factors in order to determine how the worker should be classified. If the Secretary determines that a business has misclassified a worker, the Secretary is required to notify the Department of Revenue, and refer the matter for collection of income withholding taxes.

The Secretary is also authorized to develop rules and regulations to implement this new law.

In 2010, the U.S. Department of Labor announced a new campaign, spearheaded by its Wage and Hour Division, to assist workers who suspect they are being improperly paid or have been misclassified to request assistance from the DOL. This campaign is simply titled “We Can Help.” The DOL plans to add more enforcement personnel to assist in these efforts.

The U.S. Internal Revenue Service has also been engaged in an audit campaign focusing on misclassification of employees. The IRS website contains considerable information regarding the distinction between employees and independent contractors.