Employers Misclassifying Workers as Independent Contractors: A Six-Pack of Employee Misclassification Laws

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The National Law Review
Friday, January 24, 2020

… Gov. Murphy signed 6 new laws that address the misclassification issue and provide for significant liabilities for those employers found to have misclassified workers. …

A 5838 – Stop Orders

Under this law, the New Jersey Department of Labor (“DOL”) is now empowered to issue stop-work orders against any employer who is found to be a violation of “any State, wage, benefit and tax law.” This would include failure to pay wages required by law and misclassification of a worker as an independent contractor. The stop-work order would require the cessation of all business operations at the place where the violation exists. …

A 5839 – Additional Penalties

… New penalties are now available against employers who misclassify workers. The new law provides an administrative “misclassification penalty” of up to $250 for each misclassified employee for first violations, and up to $1,000 per employee for each subsequent violation. In addition, a penalty will be paid to the misclassified worker of “not more than 5 percent of the worker’s gross earnings over the past twelve months from the employer who failed to properly classify them.”

A 5840 – Joint Liability

… Gov. Murphy amended the Wage Theft Act so that there is also joint and several liability when the state employment tax laws are violated. So, if you use contract employees and your contractor improperly classifies its workers as independent contractors, you could be liable for all the fines, penalties, and damages resulting from this misclassification.

A 5843 – Notice Posting

This law requires employers to post in the workplace a notice of the prohibition against misclassifying workers, the benefits and protections available to employees and the remedies available under all of the new laws. The DOL is tasked with developing and issuing a form of notice for employers. The law also … provides a private cause of action for employees who are retaliated against. Finally, any employer who violates any part of this law shall be guilty of a disorderly person’s offense and pay fines between $100 and $1,000. …

S 4226 – DOL Website Posting

This law permits the DOL to post on its website the name of any person who is found to be in violation of any state wage, benefit, or tax law, and who has had a final order issued against them by the DOL Commissioner. …

S 4228 – Tax Data Sharing

This law permits the State Division of Taxation to share with the DOL the following information (which was previously deemed confidential): tax information statements, reports, audit files, returns, or reports of any investigation for the purpose of labor market research or assisting in investigations pursuant to any state wage, benefit or tax law.

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Press Release: AG Racine Announces Two District Employers Must Pay Nearly $500K In Unpaid Wages To Workers And Penalties (DC)

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News Release – DC Office of the Attorney General
Jan. 2, 2020

WASHINGTON, D.C. – Attorney General Karl A. Racine today announced that the Office of the Attorney General (OAG) resolved two wage theft enforcement actions against two District employers that require them to pay nearly $500,000 in relief to harmed workers and penalties to the District. In a settlement with the Office of the Attorney General (OAG), Rock Spring Contracting, LLC, a construction company, is required to pay over $280,000 for allegedly misclassifying workers as independent contractors and depriving them of legally-mandated paid sick leave and overtime pay. …

Under the District’s Workplace Fraud Act, which applies to the construction industry, companies are required to classify most workers as employees and those who fail to do so can face significant penalties. …

OAG’s Increased Efforts to Fight Wage Theft

In 2017, OAG worked with the Council of the District of Columbia to grant the agency independent authority to investigate and bring wage theft cases, and to increase penalties on employers who violate the District’s wage and hour laws. Since then, OAG has launched more than 30 investigations into wage theft and payroll fraud and has taken action against a home health care provider, a national electrical contracting firm, KFC franchises, a cell phone store, a cafe chain, and other businesses that harmed District workers. AG Racine also recently testified before Congress and highlighted findings from an OAG report about how worker misclassification-a type of payroll fraud-hurts workers, undercuts law-abiding businesses, and cheats taxpayers. Read our latest factsheet on OAG’s work to protect District workers.

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Report: Construction Workers Frequently Denied Compensation Coverage (TN)

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Labor brokers are putting workers at risk to avoid paying insurance premiums

By Alejandro Ramirez
Feb 12, 2020

A new report from the Tennessee Bureau of Workers’ Compensation Compliance Program highlights how construction companies and subcontractors are misclassifying workers to avoid paying workers’ compensation. The report details several other practices rampant in the construction industry that deny protections to workers and give noncompliant businesses a financial edge when it comes to securing contracts.

These practices put workers at risk. If workers are injured on the job, for instance, there’s a chance their employers won’t compensate them because they’re listed as independent contractors rather than as employees. Noncompliance also costs the state tax dollars, though the amount of dollars owed is difficult to pin down, especially when employers try to hide information from assessors.

“It’s sort of like an iceberg,” says Amanda Terry, the bureau’s director of compliance. “What we believe that we’re seeing is only 10 percent – the part that’s above the surface.”

The state collects 4.4 percent on workers’ compensation premiums, and the report says that in 2016, insurance carriers may have lost as much as $296 million.

The report says many employers also hire workers through subcontractors known as labor brokers, which frequently misclassify employees. Contractors hire these brokers, who in turn provide workers for a construction site. Many of these brokers have also been accused of wage theft and other compliance issues.

“We find that … when an employer is doing the wrong thing with their workers’ comp, they’re generally doing the wrong thing across the board,” says Terry.

These practices give labor brokers an unfair advantage. Victor White, director at Mid-South Carpenters Regional Council, a union representing carpenters, tells the Scene that a law-abiding contractor “walks in the door at a 20 percent disadvantage” compared to noncompliant businesses when it comes to bidding on contracts.

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Northam releases recommendations to protect Virginia workers from misclassification, payroll fraud

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Published Sunday, Nov. 24, 2019, 7:52 pm

Gov. Ralph Northam this week released the final report of his Inter-Agency Taskforce on Worker Misclassification and Payroll Fraud, which outlines 11 recommendations to ensure Virginia workers receive the pay, workplace protections, and benefits they have earned.

The report is the result of Executive Order Thirty-Eight signed by Governor Northam in August, which directed the Taskforce to produce updated recommendations to measure and combat misclassification ahead of the 2020 General Assembly session.

An estimated 214,000 Virginia employees are currently misclassified as “independent contractors” by their employers. Among other remedies, the Taskforce recommends increased education for employers and employees, additional funding for investigations into possible wrongdoing, and harsher penalties for businesses that illegally misclassify their workers.

“It’s clear that misclassification is robbing Virginia workers of the pay, benefits, and protections they have earned,” said Northam. “These concrete policy changes will make a tremendous difference for thousands of Virginians and their families, and I look forward to working with the General Assembly to turn these recommendations into law.”

Misclassification keeps workers from receiving fair workplace protections and benefits, creates a competitive disadvantage for Virginia businesses that follow the law, and deprives the Commonwealth of an estimated $28 million in tax revenues each year. The General Assembly has considered the harm of worker misclassification for over a decade.

“After engaging with workers, businesses, and stakeholder groups over the last year, it’s clear that worker misclassification needs to be addressed,” said Chief Workforce Development Advisor Megan Healy. “I am ready to take action to support all workers in Virginia.”

The Taskforce is co-chaired by Secretary of Commerce and Trade Brian Ball and Chief Workforce Development Advisor Megan Healy. Members include representatives from the Virginia Employment Commission, the Workers’ Compensation Commission, the Department of General Services, the Department of Labor and Industry, the Department of Professional and Occupational Regulation, the Department of Small Business and Supplier Diversity, the Department of Taxation, and the Office of the Attorney General.

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How California’s AB5 protects workers from misclassification (CA)

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Fact Sheet * By Celine McNicholas and Margaret Poydock * November 14, 2019

In September, California adopted a new law aimed at combatting the misclassification of workers. The legislation, Assembly Bill (AB) 5, will take effect on January 1, 2020. AB5 adopts the “ABC” test that has been used by courts and government agencies to determine employee status. Under this test, workers can only be classified as independent contractors when a business demonstrates that the workers:

1. Are free from control and direction by the hiring company;
2. Perform work outside the usual course of business of the hiring entity; and
3. Are independently established in that trade, occupation, or business.

Workers who don’t meet all three of these conditions must be classified as employees for purposes of state wage and hour protections. AB5 will help ensure that California’s workers who perform core work under company control versus as independent businesses have access to basic labor and employment protections and benefits denied independent contractors, including minimum wage and overtime protections, paid sick days, workers’ compensation benefits, and unemployment insurance benefits. Further, the legislation will protect law-abiding businesses that properly classify workers from unfair competition from companies that cut costs by misclassifying workers: AB5 will make it more difficult for companies to avoid paying their fair share of Social Security, Medicare, and unemployment insurance taxes and avoid providing state workers’ compensation insurance. In contrast, employers would not be held accountable under a ballot initiative backed by digital platform companies.

Misclassification is widespread

The misclassification of workers as independent contractors is a serious and persistent problem nationwide. A 2000 study commissioned by the U.S. Department of Labor found that between 10% and 30% of audited employers misclassified workers and that up to 95% of workers who claimed they were misclassified as independent contractors were reclassified as employees following review.

Misclassification robs millions of workers of labor and employment law protections and deprives federal and state governments of billions in tax revenues

How a worker is classified has serious implications. For workers, the costs of misclassification are high. Most federal and state labor and employment protections are granted to employees only, not independent contractors. So, when an employer misclassifies a worker as an independent contractor, the employer robs that worker of the basic protections intended to serve as foundational standards for all workers. For example, a misclassified worker loses access to a minimum wage and overtime pay, and is no longer protected from discrimination and sexual harassment. Further, workers face additional financial responsibilities, including taxes and insurance obligations (see Table 2). For these reasons, independent contractor status should apply only to those workers who have made the decision to go into business for themselves and where the firms that they contract with do not control the way they get their job done.

State and federal governments also lose when workers are misclassified. As noted, companies that misclassify workers avoid paying their fair share of Social Security, Medicare, and unemployment insurance taxes and avoid providing state workers’ compensation insurance. The state of California estimates that the annual state tax revenue loss due to misclassification is as high as $7 billion.

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Constructing a Cheaper Classification of Workers (LA)

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“A contractor who doesn’t do it right can bid lower than those who do.” – Louisiana Legislative Auditor Daryl Purpera

By Sue Lincoln
June 26, 2019

From the time in early 2016 that newly-minted Gov. John Bel Edwards signed his first executive order accepting Medicaid expansion, arch-conservatives in the state legislature have been sounding alarms over purported fraud in the program. And when Louisiana Legislative Auditor Daryl Purpera addressed the Baton Rouge Press Club on Monday, June 24, he didn’t hesitate to wax eloquent on that topic. In particular, Purpera reiterated his “need” to access taxpayer-specific Department of Revenue information. The Revenue Department has refused to provide that data, and presently the Auditor is suing them for it, asking the courts for a declaratory judgment that will authorize release of the information.

In addition to the cause celebre of alleged Medicaid fraud, Purpera also had a few things to say about a new performance audit issued earlier in the day, which looks at how the Louisiana Workforce Commission is handling the problem of “misclassified workers”.

“Our audit samples, covering 2014 through 2018, showed employers misclassifying workers failed to pay nearly $3-million in unemployment taxes,” Purpera told the Press Club. “In addition, they failed to collect and remit an estimated $9-million of state income tax from these workers.”

This isn’t about putting someone on the payroll as a receptionist when she is actually performing the duties of a secretary, to cover up for paying her less. Nor is it about designating a busboy as a waiter, so that instead of paying him $7.25 per hour, you can get away with paying him just $2.13. Instead, as stated in the audit, “Worker misclassification occurs when an employer improperly classifies a worker as an independent contractor instead of an employee.”

An employee is subject to payroll withholding of taxes, and is eligible for employment benefits such as insurance. An independent contractor is instead paid a flat amount, and is responsible for paying his or her own taxes and/or insurance.

“This is pervasive in some industries,” Purpera stated. “Construction particularly.”

Federal law requires each state’s labor agency to annually audit one-percent of all employers and one-percent of total employee wages, and this report notes the Louisiana Workforce Commission is in full compliance with that rule. In fact, LWC is ranked 2nd in the nation for its employer audit program. This legislative audit also states LWC consistently found the more misclassified workers within construction companies than within other types of employers: on average, 12 workers for each construction firm audited. From 2016 through 2018, 453 audits of construction companies (15.4% of the total number of employer audits reviewed) revealed 5,493 misclassified workers (or nearly 42% of all the 13,106 workers determined to be misclassified.)

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Singleton Calls for Crackdown on Employee Misclassification (NJ)

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November 13, 2019

Moorestown, NJ – Senator Troy Singleton today called on the Executive Branch of State Government to stop the rampant and widespread illegal abuse of workers in the construction industry through employee misclassification.

Companies who misclassify full-time workers as contractors commit wage theft by paying below minimum wage, establishing illegal work weeks, paying cash and evading taxes – all to increase profits. Senator Singleton called on the NJ Department of Labor, the Attorney General’s Office, the Department of Treasury, and the Governor’s Task Force on Misclassification, to continue to address this issue.

“Employee misclassification is a problem because when workers are misclassified as independent contractors by their employers, it not only diminishes their access to labor protections, but it also has real consequences on the State’s economy and tax revenues,” said Singleton. “Ensuring workers are treated fairly is a priority for me and while progress has been made when the Governor signed my Stop Work Order legislation, more needs to be done to protect workers and hold offenders accountable.”

Singleton was the prime sponsor of Senate Bill 2557, which concerns stop-work orders related to prevailing wage and construction worker employment. S2557 was signed into law in July 2019 and would permit the Commissioner of the Department of Labor and Workforce Development to issue a stop-work order against an employer upon determining that an employer has paid a worker less than the prevailing wage. The stop-work order would apply to every site where the violation continues to occur. It could only be lifted by the Commissioner if the Department finds the employer has agreed to pay future wages at the required rate, return any back-wages owed to workers and pay any penalty assessed by the Department.

“There must be a level playing field for all New Jersey workers,” continued Singleton. “As a devout supporter of the construction trades, I call on those in the Executive Branch of our state government to use all available resources to crack down on this unfair practice immediately.”

The William J. Hughes Center at Stockton University released a study that said approximately 35,000 workers are illegally misclassified as independent contractors, while the state is losing $25 million a year in tax revenue due to the fraud.

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Sweeney Bill Would Protect Workers Against ‘Misclassification’ (NJ)

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November 14, 2019

Trenton – A bill authored by Senate President Steve Sweeney that would help protect workers from being exploited through their misclassification as independent contractors gained the approval of the Senate Labor Committee today.

“This is a pro-worker bill for the new gig economy,” said Senator Sweeney. “It will codify into law existing regulations and close a loophole that has allowed for the misclassification and exploitation of some employees. It’s all about protecting the rights of workers.”

A misclassification is the improper designation of workers as “independent contractors” rather than “employees” in order to allow employers to evade basic workers’ rights. Employers are required to contribute to unemployment and temporary disability insurance, abide by labor protections such as the minimum wage and overtime, allow employees to take maternity, paternity, and family leave, and withhold New Jersey income taxes – but they are not required to do the same for independent contractors.

“Misclassification not only hurts workers, it hurts law-abiding businesses and the state,” said Senator Sweeney. “The businesses that don’t play by the rules aren’t paying into the unemployment fund or the disability fund, which raises costs for workers and all other businesses. It shortchanges everyone else.”

Currently, the “ABC test,” adopted by the New Jersey Department of Workforce Development and affirmed by the New Jersey Supreme Court, is used to determine whether a worker should be classified as an employee or independent contractor for the purpose of labor and tax laws.

The bill would strengthen the “B prong” of the three-part test so that workers could not be deemed exempt from employee status because they perform their work “outside of all the places of business of the enterprise for which the service is performed.” It would also strengthen the “C prong” of the test by requiring that work performed to meet this standard is in an independently established trade, occupation, profession, or business in which the individual providing the service is customarily engaged.

The bill, S-4204, was approved with a vote of 3 – 1.

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Murphy’s Task Force Takes Hard-Line Approach Against Employee Misclassification (NJ)

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The governor’s task force issued a report outlining a comprehensive and aggressive approach that includes nine key recommendations to combat misclassification.

By Brittany E. Grierson

September 12, 2019 at 12:00 PM

New Jersey Governor Phil Murphy’s attention to employee-friendly workplace laws shows no sign of waning. In May 2018, Gov. Murphy signed Executive Order No. 25, which established the Task Force on Employee Misclassification. The Task Force, charged with advising the governor’s office on strategies to effectively combat employee misclassification and ensure compliance with wage and hour laws, comprises representatives from various state governmental agencies, including the Departments of Labor and Workforce Development (DOL), Treasury, Agriculture, Banking and Insurance, and Transportation. On July 9, 2019, after the Task Force held public forums throughout the state, where it allowed employers, employees and subject matter experts to voice comments and concerns about misclassification, it published a report with its recommendations to combat misclassification.

The report defines misclassification as “the practice of illegally and improperly classifying workers as independent contractors, rather than employees,” and claims that there has been an uptick in the number of misclassifications throughout the country, and specifically in New Jersey. Significantly, minimum wage and overtime laws apply to employees, but do not apply to independent contractors. Currently, the “ABC test,” adopted by the New Jersey Supreme Court in Hargrove v. Sleepy’s, 220 N.J. 289 (2015), is used to determine whether a worker should be classified as an employee or independent contractor. The “ABC test” presumes that an individual is an employee, unless the employer demonstrates:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and
(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

In its report, the Task Force outlines a comprehensive and aggressive approach that includes nine key recommendations to combat misclassification. The recommendations are outlined below:

1. Targeted Education and Public Outreach

First, the Task Force recommends focusing on spreading awareness about the illegality of misclassification. The Task Force suggests that a press strategy be developed to educate employers on their obligations under the wage and hour laws, and to reinforce that misclassification is closely monitored by the state and that findings of misclassification may result in harsh penalties. Further, the Task Force recommends that a DOL hotline, webpage and email address be created to enable individuals to report instances of misclassification, and that employers be required to post notices in the workplace about misclassification to inform workers of the illegal practice.

2. Strengthening State Contracting

The Task Force proposes that all employers who contract with or receive funding from the state contractually affirm that they are aware of the laws regarding worker classification and that their workers will be paid the proper rates for all hours worked. Further, the report states that in the event such employers misclassify workers, they should be at risk for losing their state contracts or state funding.

3. Interagency Coordinated Enforcement

Central to the Task Force’s strategy to combat misclassification is a call to all state agencies to coordinate interagency enforcement efforts. Such efforts may include interagency on-the-ground investigations and joint enforcement sweeps. For example, the report notes, state agencies like the Office of the Attorney General’s Division of Alcoholic Beverage Control, which presently collects and reviews payroll records, should share those records with the DOL. The Task Force points out that coordinated interagency efforts will help to pool together agency resources and ensure that investigation efforts are not duplicated.

4. Data Sharing

To assist with coordinated interagency enforcement efforts, the Task Force recommends that a network be established to allow for data sharing, subject to applicable confidentiality requirements, among state agencies. This network of shared information would serve as the basis for interagency investigations and would include information collected from regular field visits. It was further suggested that a Memorandum of Understanding that details the obligations of the data sharing network be implemented.

5. Cooperation with Neighboring States

Because many companies have operations in neighboring states, the Task Force recommends that neighboring states commit to help each other with wage enforcement efforts. Note that immediately after the release of the Task Force’s report, New Jersey acted on this recommendation. On July 9, 2019, the DOL entered into a reciprocal agreement, effective immediately, with Pennsylvania’s and Delaware’s Departments of Labor to “maximize each state’s wage and hour enforcement efforts.” The memorandum states that each state’s Department of Labor will: share relevant wage enforcement information, which includes, but is not limited to, wage claims, audit reports, investigation reports, payroll records, employer registration records, and internal labor department records; notify each other of potential violations of the others’ statutes; and assist each other with enforcement activities, such as investigations. The agreement is effective for three years and may be extended by agreement of the participating state agencies.

6. Cross-Training

The Task Force emphasizes that interagency cross-training is essential for coordinated enforcement efforts. As such, to support effective identification and referral of potential misclassification issues to the DOL, the report recommends that field investigators at various agencies be trained on the ABC test and other relevant laws. In a nod to the Task Force’s work, starting in January 2019, investigators from the Division of Consumer Affairs began to receive training on identifying employee misclassification.

7. Criminal Referrals

Although New Jersey law provides for criminal action against offending employers, legal
action is generally limited to civil proceedings. However, this may soon change. The Task Force recommends that particularly egregious cases of misclassification be referred to the Office of the Attorney General to be criminally prosecuted.

8. Using Existing Workers’ Comp Laws to Bolster Misclassification Enforcement

The Task Force notes that independent contractors are generally not eligible for workers’ compensation coverage. As such, the Task Force recommends that the enforcement offices responsible for workers’ compensation laws add relevant misclassification laws to their focus.

9. Utilizing DOL’s Power to Revoke and Suspend Licenses

Lastly, under N.J.S.A. 34:15-57.4, the Commissioner of Labor has the authority to suspend or revoke any licenses held by an employer, if that employer is found to be in violation of the state wage, benefit, and tax laws; however, the Task Force holds that this power has never been used. The Task Force encourages the DOL to exercise this authority to combat misclassification.

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SWACCA President to Testify Before House Committee on Misclassification in the Construction Industry

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Business Wire
September 25, 2019 11:22 AM

WASHINGTON – On Thursday, Sept. 26, at 10:15 a.m. EDT, Matt Townsend, the President of the Signatory Wall and Ceiling Contractors Alliance (SWACCA) and Chief Executive Officer of OCP Contractors, Inc., located in Holland, Ohio, is scheduled to testify before the U.S. House of Representatives’ Committee on Education and Labor Workforce Protections Subcommittee at a hearing titled Misclassification of Employees: Examining the Costs to Workers, Businesses, and the Economy

In his testimony, Townsend will outline how the misclassification of employees impacts the construction industry, particularly the competitive disadvantage it creates for law-abiding employers.

“SWACCA appreciates the opportunity to highlight for Members of Congress the pervasiveness of employee misclassification in the construction industry,” said Townsend. “Law-abiding employers like the ones SWACCA represents do not wish to be complicit in misclassification in order to compete. I look forward to sharing with Congress exactly how these misclassification schemes tilt the playing field against law-abiding employers in the construction industry while also harming workers and taxpayers.”

SWACCA has established itself as a leader in the fight against misclassification in the construction industry. Last Congress, SWACCA strongly opposed passage of legislation that would have eliminated barriers to misclassifying workers as independent contractors. A letter submitted on behalf of SWACCA opposing passage of the bill was cited in a House Committee report and on the floor of the House of Representatives during debate. SWACCA also fought to ensure that an IRS rulemaking initiated by the passage of the 2017 tax reform legislation did not create a financial incentive for workers to accept being misclassified in exchange for a favorable “pass-through” tax deduction.

The Misclassification of Employees: Examining the Costs to Workers, Businesses, and the Economy hearing will take place in the House Education and Labor Workforce Protections Subcommittee on Thursday, Sept. 26 at 10:15 a.m. EDT in the Rayburn House Office Building Room 2175. A livestream will be available here.

The Signatory Wall and Ceiling Contractors Alliance (SWACCA) is a national organization of signatory wall and ceiling contractors committed to working in partnership with its workforce to provide the highest-quality, most efficient construction services possible to its customers. SWACCA prides itself on representing companies that fully embrace their commitment to their customers and their employees.

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