Employee misclassification, according to the United States Department of Labor's ("DOL") Wage and Hour Division, is one of the "most serious problems" facing the entire U.S. economy. The Department tells a grim story: Employees who are misclassified as independent contractors miss out on many benefits, including overtime pay, workers compensation, and unemployment insurance. Employers who misclassify workers glean an unfair competitive advantage by reducing their payroll costs. And misclassification hampers state and federal governments' ability to collect needed tax dollars.
Because of the perceived gravity of the issue, the feds are taking extraordinary steps to partner with state agencies to investigate— and potentially punish—those employers who may have improperly treated their workers as "independent contractors" instead of as employees.
North Carolina recently joined 33 other states that are cooperating with the DOL on its "Misclassification Initiative." That program has a number of stated goals (e.g., to increase compliance with tax requirements and wage laws; to reduce "abusive" employment schemes) but in the near term, the Misclassification Initiative means one thing for employers: increased government scrutiny surrounding employment decisions.
Under the program, state and government regulators will be working together to ramp up enforcement activities. First, under new agreements the DOL and state agencies will be able to exchange information about on-going investigations confidentially. That includes sharing leads, complaints, and reports of possible violations. Second, the DOL and the North Carolina Industrial Commission (like similar offices in other states) have agreed to provide one another statistical data on the incidence of violations in specific industries and geographic areas.
This ability to share information and work together on investigations will lead to coordinated enforcement of wage and hour laws and shows that regulators are serious about leveraging and strategically applying their resources. Already, the DOL's website touts how its investigations have resulted in the payment of $74M in back wages to over 100,000 workers in janitorial, temporary help, food service, day care, hospitality, and garment industries, to name a few. If it is not already the case, trucking and transportation companies may be wearing the bulls-eye next.
The Misclassification Initiative also seeks to coordinate state and federal messaging to employers about their duties to properly pay employees and to pay employment taxes, workers' compensation, and unemployment benefits. It wants to reach workers about classification issues, too. Widely-available DOL materials are encouraging independent contractors to examine their work arrangements. Among other things, the DOL is telling workers that:
- Employers may not misclassify an employee for any reason, even if the employee agrees.
- The issuance of a 1099 form does not create an independent contractor relationship.
- The execution of an independent contractor agreement does not, in and of itself, make a worker an independent contractor under the Fair Labor Standards Act ("FLSA").
- "Common industry practice" is not an excuse to misclassify workers.
- The existence of an employee identification number ("EIN") or paperwork stating that a worker is performing services as a Limited Liability Company or other business entity does not make him an independent contractor under the FLSA.
Similar messages from the North Carolina Industrial Commission and other state agencies are sure to follow and be promoted as part of the Misclassification Initiative, too.
So, what is a business facing stepped-up enforcement to do? Those who utilize independent contractors should review with counsel their worker classifications and identify and address areas that might invite government scrutiny. In this heightened regulatory environment, businesses should also understand that any aggressive decisions about worker classification—even correct, well-reasoned decisions—may draw attention not only from regulators but also from unhappy employees and whistleblowing competitors who perceive unfairness in the labor market. These kinds of complaints are likely to increase, and businesses, especially those in trucking and transportation, should be ready to meet them directly.
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