The Department of Labor (DOL) is launching a program whereby states and the federal government will share information on the misclassification of employees as independent contractors, and the DOL in turn will rat to the Internal Revenue Service (IRS). The goal is to increase penalties for misclassifying employees and thereby restrict or eliminate the practice.

The states will be able to collect unemployment insurance (IU) premiums and penalties, the DOL will assess federal fines and penalties, and the IRS will go after back payroll taxes.

As Patricia Smith, Labor's top lawyer, put it: "There's more of an incentive to be in compliance because the cost of what we consider to be illegal activity has increased."

The DOL has published several tests for what constitutes an independent contractor (IC), and most companies using the IC status as a gateway to full-time employment routinely violate them. For instance, an IC must work with no supervision at his or her own hours and place of operation.

"The urgency of addressing this issue has become more pronounced because we're seeing these illegal business practices used by more and more industries, like restaurants," said Nancy Leppink, head of the department's Wage and Hour Division.

States that so far have agreed to work with the Labor Department so far include Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington. New York plans to sign up in the near future. Others are being solicited.