New York State Signs Agreements with U.S. Department of Labor to Partner in Preventing Independent Contractor Misclassification; 15th State to Join Federal Misclassification Initiative

Earlier today, November 18, 2013, the Wage and Hour Division of the U.S. Department of Labor entered into a Partnership Agreement with the Labor Bureau of the New York State Office of Attorney General and a similar Agreement with the New York State Department of Labor.  Both agreements are for three years and provide for coordinated enforcement activities as well as data sharing and exchange of information.

New York is the fifteenth state since September 2011 to sign this type of agreement with the Wage and Hour Division of the U.S. Department of Labor under the federal Misclassification Initiative. The other states are California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington.  The Wage and Hour Division also entered into a comparable Memorandum of Understanding in September 2011 with the Internal Revenue Service (IRS).

What the Agreements Provide

A close review of the two new agreements indicates that the New York State and federal officials will, among other things:

  • coordinate investigations and conduct joint enforcement activities;
  • make referrals to each other;
  • exchange and share investigative leads, complaints, and referrals of possible violations;
  • notify the other agency about the commencement of hearings, litigation, and other legal proceedings;
  • provide information to the other governmental agency about settlements and other case dispositions;
  • exchange confidential unemployment compensation information; and
  • mutually disseminate outreach materials to the regulated community.

Comments by the Government Officials Involved: Use of an Independent Contractor Model is OK, But Not When Used to Misclassify Employees

In its press release today, the Wage and Hour Division, on the one hand, reassured companies that comply with laws governing independent contractors: “Business models that . . . [use] independent contractors are not inherently illegal, but they may not be used to evade compliance with federal labor law.”  The press release also noted that “legitimate independent contractors are an important part of our economy.”

On the other hand, the Wage and Hour Division’s Deputy Administrator Laura Fortman stated that the U.S. Department of Labor is “standing together with the State of New York to protect workers” because, she added, “misclassification deprives workers of rightfully-earned wages and undercuts law-abiding businesses.”

M. Patricia Smith, U.S. Solicitor of Labor (who is also the former Chief of the Labor Bureau of the State Attorney General’s Office and former Commissioner of the New York State Department of Labor) stated that   “working with the states is an important tool in ending misclassification.”  She added: “These collaborations allow us to better coordinate and ensure compliance with both federal and state laws alike.”

Terri Gerstein, the current Labor Bureau Chief for New York Attorney General Eric T. Schneiderman, mentioned that “sharing information and cooperating in investigations will help protect the rights of New York’s workforce, and will lead to more effective enforcement and greater compliance by employers.”

The Wage and Hour Division’s press release further notes that in the last two years, it has secured over $18.2 million in back wages for more than 19,000 workers where the workers were found to be misclassified as independent contractors or simply not treated or classified as employees. This reportedly represents a 97 percent increase in back wages following the implementation of these agreements with the states.

Takeaways

Although the comments by the officials involved focus primarily upon businesses that misclassify employees, the press release expressly acknowledges that businesses may continue to use an independent contractor model – provided they do so in a manner in compliance with state and federal laws. Thus, the main takeaway from today’s announcement is that companies in New York and elsewhere should focus on independent contractor compliance.

Consistent with that mantra, many companies have resorted to the use of a process such as IC Diagnostics™ and comprehensive tools designed to assess and enhance a business’s level of independent contractor compliance.  Far too many companies using independent contractors continue to believe unwittingly that they are immune to misclassification liability simply because they have in place an agreement that recites that the workers are independent contractors.  Other businesses are savvier, recognizing that such agreements are essentially worthless if their structure and implementation of the independent contractor relationship is more akin to an employee relationship.  But far too many companies experience corporate paralysis, recognizing that they may be exposed to costly misclassification liability but continue to do little or nothing to minimize or eliminate their exposure.

Other companies have used a process such as IC Diagnostics™ and its component tools to effectively restructure, re-document, and re-implement their independent contractor relationships to enhance compliance and minimize or eliminate misclassification liability – if they wish to retain their independent contractor model.  Other compliance choices include reclassification and redistribution of workers.  Because enhancing independent contractor compliance is readily attainable, the only choice that makes little sense for most companies is standing pat and simply hoping that they will not be forced to defend themselves in a legal or administrative challenge to their independent contractor classifications.

Written by Richard Reibstein.

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