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Wisconsin Crackdown on Worker Misclassification Nets $1.4 Million for Taxpayers

Ongoing efforts to root out the problem of worker misclassification in Wisconsin have resulted in the recovery of more than $1.4 million in unpaid taxes, interest, and penalties, according to state officials.

But that figure doesn't take into account the amount of money that would have been lost if employers had not been put on notice that the state will not tolerate unethical businesses cheating the system, officials said. In short, state officials say increased enforcement has led to better compliance. 

Worker misclassification happens when employers intentionally designate employees at 1099 subcontractors with the intent to avoid paying payroll taxes, unemployment taxes, and workers’ compensation insurance. Doing this allows those unethical companies to offer lower bids on projects, undercutting law-abiding contractors.

Of course, there are many legitimate uses of contract labor. The problem arises when the designation is abused to skirt the law.

“The state's efforts to reduce worker misclassification is part of a multi-pronged, anti-fraud initiative that is designed to ensure employers comply with requirements to classify workers correctly as employees or independent contractors under unemployment, worker's compensation and equal rights law,” said the state’s Department of Workforce Development.

“Employers who misclassify workers as independent contractors unfairly avoid UI tax and other tax obligations,” the department said. "Conversely, combating worker misclassification has protected and strengthened the state's UI Trust Fund, which ended 2017 with a balance of nearly $1.5 billion and increased $313 million over the year.”

"The state's UI program plays an important role in helping workers as they rapidly transition from a period of unemployment to a new, rewarding career," said Workforce Development Secretary Ray Allen.

The department has a Worker Misclassification Unit staffed by “seasoned, former law enforcement professionals,” many of whom “specialized in investigating white-collar crime during their previous careers,” per the state.

The unit has been in place since 2013. Since then, it's conducted more than 1,500 on-site investigations and thousands of employer audits.

They've also published educational videos to "assist employers in properly classifying workers" and "to help employers prepare for a UI tax hearing."

“We owe it to the Wisconsin employers that fund this vital program to ensure that everyone plays by the rules so that workers who are out of work through no fault of their own have access to the temporary safety net they need, and so that businesses don't gain an unfair competitive advantage by skirting legal obligations,” Secretary Allen said.

"Although strong penalties exist for employers that intentionally misclassify workers as part of their business practices, we aim to use those measures only for the most egregious cases, choosing first to educate employers and encourage them to voluntary comply with UI tax law," Allen said.

"We thank the Governor, members of the Wisconsin State Legislature as well as the Unemployment Insurance Advisory Council for providing us with the tools to help level the playing field for Wisconsin employers who follow the law,” Allen said.