Senate Re-Loads on Independent Contractor Misclassification: New Bill Characterizes Misclassification as “Payroll Fraud”

On Friday, April 8, 2011, Senators Sherrod Brown (D-Ohio), Tom Harkin (D-Iowa), and Richard Blumenthal (D-Conn.) introduced the Payroll Fraud Prevention Act (S. 770), a trimmed-down version of the Employee Misclassification Prevention Act bill that was introduced into both houses of Congress a year ago. Taking a cue from state legislators that have labeled new state laws involving wage violations as a form of “payroll theft,” the sponsors of the bill characterize misclassification of employees as a form of “payroll fraud.”

The bill, if enacted, would expand the federal Fair Labor Standards Act (which currently addresses minimum wage, overtime, and child labor laws) to cover misclassification of employees as independent contractors. It would create a new definition of workers called “non-employees,” impose upon businesses the obligation to provide a classification notice for both “non-employees” and “employees,” make the misclassification of “employees” as “non-employees” a new labor law offense, and expose businesses to fines of up to $5,000 per worker for each violation of the law.

Unlike last year’s bill introducing the Employee Misclassification Prevention Act (EMPA), this proposed legislation would not impose new recordkeeping requirements upon businesses, thereby removing one of the more objectionable provisions of EMPA.

The purposes of the Payroll Fraud Prevention Act were detailed in a press release issued Monday, April 11, 2011 by one of the co-sponsors, Senator Brown. He characterized companies that misclassify employees as “cheating workers . . . and other businesses that play by the rules.” He also focused on the effect of misclassification on the “tax gap” that both the federal and state governments have been experiencing,” saying the bill will “relieve the burden on American taxpayers who foot the bill when businesses [misclassify their workers].”

Although the bill seeks to crack down on misclassification, nothing in the Payroll Fraud Prevention Act would prohibit businesses from continuing to use independent contractors that are properly classified as such; it only prohibits companies from misclassifying workers as independent contractors when such workers are really “employees.”

Nonetheless, all businesses would be affected by the Payroll Fraud Prevention Act, because it imposes a notice requirement upon every company that uses either employees or independent contractors. Further, any business that fails to provide the required notice would be subject to heavy fines, even if its independent contractors are properly classified or if it uses no independent contractors.

If enacted into law as drafted, the Payroll Fraud Prevention Act would:

– expand the Fair Labor Standards Act to cover “non-employees” who perform labor or services for businesses, even if the “non-employees” are properly classified as independent contractors;

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”;

– add a new provision making it a “special prohibited act” under federal law to “wrongfully classify an employee as a non-employee”;

– require every business to provide a prescribed written notice to all workers performing labor or services, notifying them that they have been classified by the business either “as an employee or non-employee,” directing them to a U.S. Department of Labor website for further information about the rights of employees under the law, and informing them to contact the Labor Department if they “suspect [they] have been misclassified”;

– impose upon businesses a penalty of $1,100 up to $5,000 per worker for a violation of the notice requirements or for misclassifying an “employee” as a “non-employee”;

create a presumption that a “non-employee” is an “employee” if the business fails to provide the worker with the prescribed notice at the time the “non-employee” begins providing services; and

– impose triple damages for willful violations of the minimum wage or overtime laws where the employer has misclassified the worker.

In addition, the Payroll Fraud Prevention Act would direct the Secretary of Labor to establish a misclassification website; impose additional penalties upon employers that misclassify employees for unemployment compensation purposes; authorize the Department of Labor to report misclassification information to the IRS; and direct the Labor Department to conduct “targeted audits” of certain industries “with frequent incidence of misclassifying employees as non-employees.”

The introduction of this bill is consistent with the national labor policy of the Obama Administration. Under the last-minute budget compromise reached by the President and Congress on April 8, 2011, commonly referred to as the “Continuing Resolution,” no less than $21.3 million is to be funded to the Secretary of Labor to continue “initiatives related to the identification and prevention of worker misclassification.”

Your comments are welcome.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

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