United States: New North Carolina Law Provides Mechanism For Prosecuting Worker Misclassification

On August 11, 2017, the North Carolina Employee Fair Classification Act (EFCA) was signed into law. The new law, which will take effect on December 31, 2017, provides a mechanism that allows workers to more easily report—and state agencies to more easily prosecute—employers misclassifying workers as independent contractors instead of employees. Given the increased potential impact of worker misclassification under the new law (including higher legal expenses and other costs), North Carolina employers should confirm that workers are correctly classified and resolve any issues before the December 31 effective date.

Misclassification defined

Worker misclassification remains a hot topic for employers and a priority for federal and state agencies. Workers who are classified as employees are provided certain protections under the law regarding issues like minimum wage, overtime pay, benefits, equal employment opportunities, and on-the-job injuries. Those protections do not apply if a worker is an independent contractor. In addition, employers must pay certain state and federal taxes for employees, but not for contractors.

Fundamentally, workers who are classified as independent contractors are considered separate and independent of the employer in the eyes of the law. As a result, contractors are not provided the same legal protections as employees, and employers do not have to pay employment or payroll taxes for contractors. Over the last 10 years, state and federal agencies have become much more aggressive in investigating worker misclassification and seeking to recover unpaid taxes and wages.

Summary of the EFCA

The EFCA establishes a new division of the North Carolina Industrial Commission called the Employee Classification Section (ECS). The ECS will investigate reports of worker misclassification and assist other state agencies, including the Industrial Commission, the North Carolina Department of Labor (NCDOL), and the North Carolina Department of Revenue, in recovering moneys owed as a result of misclassification. The ECS will also assist state agencies and district attorneys' offices in prosecuting employers that fail to pay penalties assessed as a result of worker misclassification.

Notably, the new statute does not change the definitions of "employee" or "independent contractor" under North Carolina law; it simply provides an enforcement mechanism for the current law. The law's practical effect, which cannot be understated, is that a single misclassification complaint could trigger a full-fledged, multi-prong investigation into an employer's classification of all workers.

However, the new law does not stop there in its effort to curb misclassification of workers. It requires employers to post a workplace notice informing workers that they should be classified as employees unless they are independent contractors and that workers who believe they have been incorrectly classified have the right to report potential misclassification to the ECS. Additionally, licensure applicants before state licensing boards must certify that they have read and understand the ECS's public notice statement defining employee misclassification and disclose any investigations into misclassification, including the outcome of the investigations. Applicants that fail to comply with those requirements will have their license, permit, or certification application denied.

Which Is It? Employee or Independent Contractor?

The EFCA applies to the misclassification of workers under multiple areas of the law, including wage and hour law, workers' compensation law, and tax law. Because different tests for determining employee and independent contractor status are applied under different areas of the law, a worker's correct classification depends on the legal context. The analysis is always a case-by-case determination and typically turns on control—i.e., whether the worker is truly an independent agent who controls her own work (an independent contractor) or whether the worker's service is controlled and directed by the employer (an employee).

For many years, the IRS utilized a list of 20 factors for employers to consider when determining workers' status for tax-related purposes, commonly referred to as the "20-factor test." In recent years, the IRS has sought to simplify the test by using a three-category analysis: (1) behavioral control, (2) financial control, and (3) the relationship of the parties. Because the 20-factor test is comprehensive, it is still a helpful analytical tool to aid employers in determining where control lies.

When answering the questions, a high number of "yes" responses means the arrangement is more likely an employer-employee relationship, while a high number of "no" responses may indicate an independent contractor relationship. No single answer is more indicative of employee status than others. The questions are:

  1. Instructions. Is the worker required to comply with the employer's instructions about when, where, and how to work?
  2. Training. Does the worker receive required training, including attending meetings and working with experienced employees, from or at the direction of the employer?
  3. Integration. Does the success of the employer's business significantly depend on the performance of the services the worker provides?
  4. Services rendered personally. Is the worker required to perform the work personally?
  5. Hiring, supervising, and paying assistants. Has the employer hired, supervised, and paid assistants for the worker?
  6. Continuing relationship. Does the worker have a continuing relationship with the employer?
  7. Set work hours. Is the worker required to follow set work hours?
  8. Full-time work. Does the worker work for the employer full-time?
  9. Place of work. Does the worker perform work at the employer's premises and use its office equipment?
  10. Sequence of work. Does the worker follow a set schedule or order in performing the work?
  11. Reporting obligations. Does the worker submit regular written or oral reports to the employer?
  12. Payment by hour, week, or month. Does the worker receive payments of regular amounts at set intervals?
  13. Payment of business or travel expenses. Does the worker receive payment for business and travel expenses?
  14. Furnishing of tools and materials. Does the worker rely on the employer for tools and materials?
  15. Significant investments. Has the employer invested in the facilities or equipment used to perform the work?
  16. Risk of loss. Are payments made to the worker set on a fixed basis regardless of profit or loss?
  17. Working for more than one company at a time. Does the worker work only for one employer at a time?
  18. Availability of services to the general public. Are the services offered to the employer unavailable to the general public?
  19. Right to discharge. Can the worker be fired by the employer?
  20. Right to quit. Can the worker quit at any time without liability?

If you are in doubt, workers should be classified as employees rather than independent contractors. Since a worker's classification as either an employee or an independent contractor is a case-by-case, fact-specific analysis, employers with large numbers of similarly situated employees are encouraged to confer with legal counsel on this issue.

This article originally was published in the North Carolina Employment Law Letter.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions