Employers that improperly treat workers as independent contractors are the target of stepped-up audit and enforcement efforts by the federal government.

With misclassification claims on the rise nationally, scrutiny is only likely to increase as the Internal Revenue Service and U.S. Department of Labor push ahead with plans to audit thousands of companies, including small businesses, for possible misclassification violations.

Some say the threat of a federal audit and hefty fines appears to be motivating employers to consult with counsel about their hiring practices.

“Because of the media attention generated by the DOL saying it’s going to look into misclassification, employers are definitely looking to us to do audits of their classifications to make sure they’re done correctly,” said Michael A. Gamboli of Partridge, Snow & Hahn in Providence, R.I. “That never happened five years ago.”

Chip Muller, a Providence employment attorney who represents plaintiffs, said the federal government’s recent crackdown on independent contractors has made employers more educated about their potential liability.

“Enforcement always helps because if the threats aren’t backed up, a lot of employers will play the odds — and they do,” he said.

Unlike Massachusetts, where the state Wage Act is among the most stringent and punitive in the nation and the attorney general has aggressively enforced the statute since it was substantially revised in July 2008, Rhode Island law is more closely aligned with the looser federal standard.

That is a positive for local employers, said Gamboli, who likens the harsh Massachusetts statute to “shooting fish in a barrel.”

Gamboli said less aggressive enforcement in Rhode Island stems from a statute that is less likely to be violated.

Thousands of audits, new law proposed

The IRS has begun what will be a three-year auditing initiative targeting misclassification, including investigations of as many as 6,000 companies, large and small.

In addition, the DOL has stepped up its efforts to pursue employers that misclassify employees, aggressively hiring more than 100 new investigators in fiscal 2010 to focus solely on compliance enforcement.

The Obama administration estimates the audits could net $7 billion in unpaid taxes to the U.S. Treasury over the next decade.

Most expect the audits will focus on those long known for their use of independent contractors, such as restaurants and hotels, the construction and health care industries, and package delivery businesses.

Nixon Peabody attorney Andrew B. Prescott said employment audits are a difficult process for clients and their attorneys. And once an employer has been singled out for review, the question is not whether the employer will have to pay, but how much, he said.

Though some employers have taken strides to tighten hiring practices to ensure they comply with federal and state law, many continue with longstanding practices that are no longer allowed.

In most cases, Prescott said, it is a lack of understanding by employers about what differentiates an employee from an independent contractor.

“People make these decisions without consulting legal counsel,” the Providence lawyer said. “There’s enough gray area so it’s easy to make a mistake.”

But some companies break out the independent contractor form because it can be a huge cost-saver.

The savings for employers by classifying and treating workers as independent contractors is about 20 to 30 percent of the cost to add them to the payroll as full-time employees, said Richard L. Alfred of Seyfarth Shaw in Boston.

By classifying a worker as an independent contractor, employers can avoid paying minimum wage, overtime pay, payroll taxes, Social Security, unemployment and workers’ compensation insurance. The company also is not required to provide health insurance or retirement benefits, or to offer paid or unpaid leave under the Family and Medical Leave Act.

In some industries, the savings produced by routinely classifying workers as independent contractors can provide a competitive advantage in bidding for projects or when labor costs are high and profit margins are razor thin or seasonal.

In other cases, companies are not always aware that outsourcing or hiring high-paid consultants to come in and work on short-term projects could invite government scrutiny.

Whether intentional or accidental, the penalties for companies that misclassify workers can be severe, with IRS fines ranging from $1,000 to $5,000 per misclassified worker, plus state law penalties. Companies also face liability if the misclassified workers seek reimbursement for unpaid wages and benefits or bring retaliation claims under federal and state labor laws.

Legislation filed in Congress last month would boost penalties and impose new requirements on employers. The Payroll Fraud Prevention Act would amend the Fair Labor Standards Act to make misclassifying employees a separate federal labor law violation punishable by an additional $5,000 in fines per employee. The measure would also require employers to give employees notice of federal employee classification laws.

A similar bill introduced last year, the Employee Misclassification Prevention Act, never advanced out of committee.

Although the bill provides for the first time the potential to bring a direct claim of misclassification, Seyfarth Shaw’s Alfred said he does not believe it is necessary since such claims can already be brought indirectly through allegations of failure to pay overtime wages.

Economic woes boost investigations

Like many other hot litigation areas, the increase in misclassification claims and the federal government’s heightened interest in enforcement are driven in large part by the bad economy, both locally and nationally.

Given the dire economic picture in the state right now, Prescott said there is little chance the General Assembly would push for tightening up wage laws in a way that would dramatically change how businesses that use independent contractors operate.

“I don’t think there’s any appetite to pass any legislation that’s seen as anti-business,” he said.

Lawyers say for those worried about an audit, the best course of action for employers and their attorneys is to take a hard look at their workplaces and evaluate what role employees are playing.

Though cases are often very fact specific, triggers for investigations include independent contractors who have been working for a particular company for a long period of time, contractors whose work is within the usual scope of an employer’s business, those who do not take other jobs or who have full-time workloads for a particular company — much like the company’s full-time employees.

Even when contractors are hired for a temporary project, how long the project lasts and what they are doing is worth examining.

Kimberly Atkins of Lawyers USA contributed to this story.