Shortly after Presidential candidate Hillary Clinton placed independent contractor misclassification in the national spotlight in mid-July 2015 when she prominently commented in a campaign speech upon the expanding use of ICs in the “gig economy,” it has been reported that Senators Bob Casey (D-PA) and Al Franken (D-MN) have introduced the Payroll Fraud Prevention Act of 2015, a bill that would outlaw IC misclassification. Candidate Clinton raised the issue of IC classification in a speech on July 13, 2015, when she acknowledged that the on-demand economy is creating exciting opportunities and unleashing innovation but noted that it is also raising hard questions about workplace protections and what a good job will look like in the future. Even though this new bill has virtually no chance to pass Congress in 2015, it is likely that a new Democratic administration, if elected, would highly endorse this bill once re-introduced in a subsequent session of Congress.
The new bill, which is yet to have a number assigned to it, is not actually new at all, having been introduced in 2013 and re-introduced in 2014 with the exact same language. The 2015 edition of the bill would expand the federal Fair Labor Standards Act (which currently addresses minimum wage, overtime, and child labor laws) to cover misclassification of employees as ICs. It would also 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,” would make the misclassification of “employees” as “non-employees” a new labor law offense, and would expose businesses to fines of up to $5,000 per worker for each violation of the law. Those provisions were included in the 2013 and 2014 versions of the bill.
The new bill would, like the 203 and 2014 bills, also impose recordkeeping requirements on businesses. This type of requirement is reminiscent of the 2010 and 2011 versions of the Employee Misclassification Prevention Act (EMPA), both of which would have added new recordkeeping obligations on all businesses – not just on those that used ICs or other categories of non-employee workers.
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” – a term seeing increasing usage by legislatures.
Detailed Analysis of the Main Provisions of the New Bill
If enacted, the Payroll Fraud Prevention Act of 2015 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 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 (a) stating that they have been classified by the business either “as an employee or non-employee,” (b) directing them to a U.S. Department of Labor website for further information about the rights of employees under the law, and (c) informing them to contact the Labor Department if they “suspect [they] have been misclassified.”
All businesses would be affected by the Payroll Fraud Prevention Act of 2015, even those that did not use any ICs or other non-employees. Each 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 ICs, 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. 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 suggest 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 get 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 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 website;
– authorize the Secretary of Labor to 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.”
Notably, although the bill seeks to crack down on misclassification, nothing in the Payroll Fraud Prevention Act of 2015 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.”
What Businesses Can Do to Minimize IC Misclassification Liability
Regardless of whether the Payroll Fraud Prevention Act of 2015 gains traction in Congress, its introduction along with Hillary Clinton’s focus on IC classifications will further heighten the already high state of attention being given to the issue of IC misclassification by state legislatures, federal and state regulators, and class action lawyers.
Although Congress has not passed any IC misclassification legislation, state legislatures have been active in passing laws cracking down 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 legislation has not diminished the activities of the U.S. Department of Labor and the IRS, who have increasingly been cracking down on businesses that misclassify ICs. As noted in prior blog posts, the DOL has embarked on a Misclassification Initiative, which seeks 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.
Perhaps the most active regulatory enforcement comes from state workplace agencies. Unemployment compensation claims have the potential to become “mini-class actions” with substantial penalties and the potential for 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.
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 by utilizing IC Diagnostics™. This is 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.
Written by Richard Reibstein