United States: Congress Re-Introduces Independent Contractor Misclassification Law

Last Updated: November 25 2013
Article by Richard J. Reibstein, Lisa B. Petkun and Andrew J. Rudolph

Sen. Bob Casey (D-PA) announced on November 12, 2013 that he had introduced a bill called the Payroll Fraud Prevention Act of 2013 at a hearing of the Senate Subcommittee on Employment and Workplace Safety. The bill is yet another effort to introduce legislation at the federal level to curtail the misclassification of independent contractors (ICs), which the sponsors equate with "payroll fraud."

The bill (S.1687), which is being co-sponsored by Sens. Tom Harkin (D-IA), Sherrod Brown (D-OH), and Al Franken (D-MN), is virtually identical to a bill (S.770) of the same name that was introduced in April 2011 – the Payroll Fraud Prevention Act of 2011.

Casey noted at the outset of the hearing that independent contractors "serve a valuable role in our economy" and that the bill is not an effort "to point fingers at companies that are following the law or law-abiding independent contractors." Instead, Casey focused on the need for Congress to pass new legislation outlawing what he called the "intentional misclassification" of employees as ICs – a practice that he labeled as "payroll fraud."

The ranking Republican member of the subcommittee, Sen. Johnny Isakson (R-GA), complimented Casey at the hearing for distinguishing between "intentional and unintentional misclassification." He urged Casey "not to throw out people playing by the rules."

A close examination of the bill, however, reveals that unintentional misclassification would indeed violate the provisions of the proposed new law. Even a good-faith misclassification would still constitute a violation.

Analysis of the Main Provisions of the New Bill

The Payroll Fraud Prevention Act would make misclassification of employees as ICs a new federal labor offense. It would expand the federal Fair Labor Standards Act (which currently addresses minimum wage, overtime, and child labor laws) to cover a new category of workers – non-employees – and make it a special prohibited act to "wrongly classify an employee as a non-employee."

The bill has a number of other key provisions, but the one most likely to receive the most attention is the obligation for every employer and enterprise to provide a classification notice for both "non-employees" and "employees." This notice would require every business to provide a written notice to all workers performing labor or services that (a) they have been classified by the business either "as an employee or non-employee," (b) directing them to a U.S. Department of Labor (DOL) Web site for further information about the rights of employees under the law, and (c) informing them to contact the DOL if they "suspect [they] have been misclassified."

Even businesses that do not use any ICs or other non-employees would be affected by the Payroll Fraud Prevention Act of 2013. Every employer or enterprise would be required to issue such notices to all its employees within six months following passage of the law for incumbent workers and, with respect to new employees and non-employees, at the commencement of the new worker's employment or IC relationship.

Any business, even one not using any non-employees and even one whose ICs have been properly classified as "non-employees," would be subject to heavy fines for violations of the new notice rule if it failed to provide the new notice specified in the Payroll Fraud Prevention Act. The civil penalties for any failure to provide a notice is a specified amount "for each employee or other individual who was the subject of such a violation" in an amount of $1,100 for a first offense and up to $5,000 for a second offense or a "willful" violation. The language of the bill may arguably indicate that if an employer or enterprise neglected to provide the required notice to a large number of workers, the penalty may be considerable – $1,100 (or up to $5,000 if a second offense) multiplied by the number of employees or non-employees who did not receive the required notice or did not receive it in a timely manner.

Another significant penalty for failure to give the required notice is the creation of a presumption that a "non-employee" is an "employee" if the business fails to provide the worker with the prescribed notice or does so in an untimely fashion. The bill further provides that the presumption of employment can only be rebutted by "clear and convincing evidence that a covered individual ... is not an employee ...."

Other Provisions of the New Bill

The new bill also would also:

  • pierce the so-called "corporate veil" by including in the definition of "non-employees" those who provide services through a corporation or LLC, if they are required to create or maintain such entities as a "condition for the provision of such labor or services"
  • impose triple damages for willful violations of the minimum wage or overtime laws where the employer has misclassified the worker
  • direct the Secretary of Labor to establish a misclassification Web site
  • authorizes the Secretary of Labor to impose additional penalties upon employers that misclassify employees for unemployment compensation purposes
  • authorize the DOL to report misclassification information to the Internal Revenue Service (IRS), and
  • direct the DOL to conduct "targeted audits" of certain industries "with frequent incidence of misclassifying employees as non-employees."

Notably, although the bill seeks to crack down on misclassification, nothing in the Payroll Fraud Prevention Act of 2013 would prohibit businesses from continuing to use ICs that are properly classified as such; it only prohibits companies from misclassifying workers as ICs when such workers are really "employees."

Another Tax Bill Aimed at Section 530's 'Safe Harbor' Reportedly Is on the Way

Casey also made reference in his remarks at the hearing to another IC bill that is likely to be introduced soon – a tax bill he said would be introduced in the Senate by Sen. Brown. In 2012, Brown was one of the co-sponsors of the Fair Playing Field Act of 2012. That bill sought to eliminate the so-called "safe harbor" in Section 530 of the Revenue Act of 1978, which has been relied upon by some businesses that for years may have consistently misclassified employees as independent contractors.

This Bill May Re-Energize the IC Misclassification Crackdown

Regardless of whether the Payroll Fraud Prevention Act of 2013 gains traction in Congress, its introduction may re-awaken attention to the issue of IC misclassification and re-energize those who have been disappointed by congressional inactivity in this area, particularly federal and state regulators, state legislators, employee rights advocates, and class-action lawyers.

Although Congress has not passed any IC misclassification legislation, state legislatures had been active in passing laws in this area. About half of the states have passed laws since July 2007 curtailing the use of ICs, increasing penalties for IC misclassification, creating IC misclassification task forces, and/or requiring state agencies to share information with other state agencies about companies that have been found to have misclassified employees as ICs.

The absence of federal IC misclassification legislation over the past six years has not diminished the activities of the DOL and the IRS, who have increasingly been cracking down on businesses that misclassify ICs. The DOL had embarked on a Misclassification Initiative that sought to coordinate DOL enforcement with state workforce agencies and the IRS and promote the sharing of information with state workforce agencies about companies that misclassify employees as ICs. The surge of that initiative may have abated over the past two years, but the introduction of the Payroll Fraud Prevention Act of 2013 may reinvigorate the federal DOL.

The most active regulatory enforcement tends to come from state workplace agencies. Unemployment compensation claims have the potential to become "mini-class actions" with substantial penalties and the likelihood of being reported to other workforce agencies whose laws may also have been violated.

Finally, plaintiffs' class action lawyers continue to target companies that have not played by the rules regarding the use of ICs.

What Should Businesses Do to Minimize IC Misclassification Exposure?

Even companies that believe they have followed the rules in their classification of ICs have been surprised to realize that they have unwittingly failed to structure, document, and implement their IC relationships consistent with state and federal laws. Many companies that use ICs or conduct business using an IC-business model have taken steps to minimize their exposure to IC misclassification liability.

Businesses have utilized IC Diagnostics", a proprietary process used to evaluate their level of IC compliance, assess compliance alternatives, and guide the restructuring, re-documentation, and re-implementation of IC relationships. These steps serve to enhance IC compliance and can minimize exposure for companies that wish to continue to use ICs – and do so without undue worries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Lisa B. Petkun
Andrew J. Rudolph
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