New York has just become the 15th state to formally align its efforts with those of the United States Department of Labor ("DOL") to crack down on the misclassification of employees as "independent contractors." New York joins 14 other states (including California, Connecticut, Massachusetts, and Washington) that have partnered with the DOL to "root out bad actors and bring them to justice," as stated in a November 18th DOL press release.
Specifically, the New York State Department of Labor and New York State Attorney General's Office executed a memorandum of understanding with the DOL to collaborate in the prevention of employers' misclassifying employees as independent contractors or as other nonemployee statuses. This is expected to penalize numerous New York employers for the improper classification of their workers. Indeed, the DOL has noted that since the implementation of these types of agreements with other states, it had collected 97% more in back wages over a 2-year period, thereby securing over $18.2 million for close to 20,000 workers who were classified improperly.
Less than one week earlier, Senator Bob Casey, D-Pa., introduced the Payroll Fraud Prevention Act (the "Act"), which would prohibit employers from misclassifying employees as independent contractors in order to evade taxes, fair labor standards, and safety protections. The Act would require employers to issue a specific notice to independent contractors informing them of their rights and providing contact information for their local U.S. labor department office. If the employer fails to give a worker notice under the Act, the government will presume the worker is an employee for all legal and tax purposes. Employers may be subject to a $1,100 fine per worker misclassification or a special $5,000 fine for repeat offenders. The Act would also require the creation of a website summarizing the law in plain language for all workers to understand. Senators Sherrod Brown, D-Ohio, Al Franken, D-Minn., and Tom Harkin, D-Iowa joined Senator Casey in sponsoring the bill.
The government has identified two main objectives of the memorandum of understanding and the Act discussed above, respectively: 1) to prevent employers from cheating their employees out of fair compensation, benefits, and protections such as family and medical leave, overtime compensation, minimum wage pay, and unemployment insurance by deliberately misclassifying them; and 2) to put on a level playing field law-abiding companies that find it difficult to compete with "those who are skirting the law."
What does this mean for employers?
It is becoming clearer and clearer that, since the economic collapse, state and federal agencies and lawmakers have intensified their efforts to eradicate worker misclassification. This trend is further evidenced by President Obama's increase in the size and budget of the Department of Labor's Wage and Hour Division over the past four years. Thus, employers, particularly those in New York or any of the 14 other states partnering with the DOL, should expect increased scrutiny and should take efforts to properly classify their workers (or at least understand, and be prepared to face, the monetary risks – which could be astronomical – if they don't).
The best of intentions aside, employers may find it difficult to distinguish between an independent contractor and an employee. However, because of the potentially astronomical risks resulting from improper worker classification, it is imperative for employers to comply with federal and state wage and hour laws and to be able to defend themselves if a lawsuit ensues. One of the most important things that an employer can do to avoid some of the risks is to be proactive and periodically engage in its own self-audits to ensure that its workers' classifications are proper. Self-evaluation lends itself to preemptive correction and could prove useful if litigation becomes unavoidable. BakerHostetler attorneys are available to assist with these efforts.
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