Report No. 2010-122
October 2010
Complete Audit Report
Findings in the audit of the Department of Labor and Industrial Relations, Misclassified Worker Investigation Procedures
Identification of Misclassified Workers
Opportunities exist for the Missouri Department of Labor and Industrial Relations (DOLIR) to improve the process of identifying and investigating misclassified workers. According to United States Department of Labor (USDOL) data, the DOLIR ranks among the lowest in the nation at identifying misclassified workers.
A worker is considered "misclassified" when an employer improperly classifies a worker as an independent contractor rather than an employee. Misclassified workers negatively impact state government through lost income taxes, lost unemployment taxes, and lost workers' compensation taxes. Because employers who misclassify workers do not pay into the unemployment or workers' compensation pools, compliant employers must pay a higher portion of the costs for these coverages than they otherwise would.
The DOLIR ranks 50th of 51 state labor agencies (includes the District of Columbia) in the nation in misclassified worker audit effectiveness, according to USDOL data from calendar years 2005 to 2009. From 1998 until 2010, the DES did not use a targeted, risk-based, approach to select employers to audit. Despite the USDOL encouraging a 10 percent random audit selection, the Division of Employment Security (DES) used 100 percent random audit over that timeframe. As a result, industries that historically have shown higher instances of misclassification have not received increased audit coverage. The DES does not perform follow-up audits of employers that misclassify workers.
The statutory definition of an "employee" in Missouri is more subjective than the majority of other states, resulting in less efficient reviews and more confusion among employers. In addition, the DOLIR does not adequately utilize Form 1099 data from the Internal Revenue Service (IRS) to identify misclassified workers. A federal audit of state unemployment insurance audit techniques stated the most powerful tool for identifying misclassified workers and searching for hidden wages is the use of IRS Form 1099 data. Finally, the DES has not utilized the ability to penalize employers for intentionally misclassifying workers. State law allows the division to penalize an employer 25 percent of the amount the state has been defrauded in the event "fraud or evasion on the part of any employer is discovered by the division."
Complete Audit Report
Missouri State Auditor's Office
moaudit@auditor.mo.gov
