President Barack Obama's federal budget proposal for fiscal year 2011 includes $25 million for an initiative targeting the misclassification of employees as independent contractors.

Obama says the additional funds would be used to hire 100 additional enforcement personnel and to provide grants to states that are trying to curb the problem.

He says both the Department of Labor and Treasury Department are pursuing a joint proposal that eliminates incentives in law for employers to misclassify their employees and enhances the ability of both agencies to penalize employers who misclassify

The misclassification of employees as independent contractors has been topic as of late. Obama says the practice deprives workers of overtime and unemployment benefits. Employers have used the practice to cut labor costs and save on taxes.

In general, two tests are used to determine whether a worker is an independent contractor or employee. One is the "reasonable basis" test, which provides a "safe harbor" to employers based on existing government or court classifications of workers in a particular business or industry and was mandated by the Revenue Act of 1978 (P.L. 95-600, Sec. 530).

The second test is the “common law test.” To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.

In addition, some workers who do not meet the reasonable basis or common-law tests for independent contractor status may still be classified as such by operation of law (i.e., statute).