This article was published in the Class Action, Commercial Contracts, Corporate, Employment, and Public Policy sections of Law360 on November 10, 2016. © Copyright 2016, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.
In the past eight years, the Obama Administration has spearheaded enforcement initiatives on independent contractor misclassification through the U.S. Department of Labor and the IRS. That crackdown, however, seemed to be focused on the low-hanging fruit – companies that often had little or no defense to the claim that they were misclassifying employees as ICs. In contrast, private class action lawyers focused and continue to focus on more challenging cases or larger or more well-known companies, like Uber, FedEx, Amazon, Macy’s, Lowe’s, DirecTV, BMW, Google, Sleepy’s, and Jani-King, to name just a few. During that same period, Congress did not pass a single bill to address the issue of independent contractor classification.
During that time, though, one of the federal government’s initiatives in this area has had significant traction: its program of entering into joint/coordinated enforcement efforts with the states. Since the U.S. Department of Labor announced its “Misclassification Initiative” in September 2011, 35 state labor departments have signed a Memorandum of Understanding (MOU) with the U.S. Department of Labor. Of those 35 states, 18 currently have Republican governors: Alabama, Arkansas, Florida, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Nebraska, New Mexico, North Carolina, Oklahoma, South Dakota, Texas, Utah, Wisconsin, and Wyoming.
Thus, it is fair to say that at the state level, IC misclassification is viewed as a non-partisan priority. Why is that? Because while some companies that retain legitimate ICs on a 1099 basis, a fairly sizeable percentage of companies that pay certain workers on a 1099 basis either (a) do not structure or document their IC relationships in a manner that complies with IC laws, or (b) have no bona fide basis for issuing a Form1099 to such workers. In both of those situations, the states are shortchanged on unemployment insurance contributions and workers’ compensation premiums, and lose the benefit of employee income tax withholdings.
In contrast to Congress, which has passed no IC misclassification legislation in the past eight years (or at any time previously), many state legislatures have passed bipartisan legislation designed to curtail IC misclassification. Those new laws increased penalties for IC misclassification, made the test for IC status more stringent, or have established state task forces to combat IC misclassification.
While it is likely that the U.S. Department of Labor may dial down somewhat their enforcement efforts in this area when a Republican administration takes over the White House and appoints a new Secretary of Labor, there is no reason to expect that state labor departments will be any less aggressive in their efforts to crack down on IC misclassification If anything, many state labor departments, especially those in states with Democratic Party governors, are likely to double down on their enforcement efforts if they feel that the U.S. Labor Department is backing away from the joint enforcement initiatives begun under the Obama Administration. Likewise, state legislatures will likely continue on their current path of passing legislation that curbs IC misclassification, particularly affecting those industries where IC misclassification is regarded as prevalent.
Companies using ICs to supplement their workforce or render services to their customers, should not view Donald Trump’s election as an opportunity to misclassify employees as ICs. Rather, such companies should expect the states to continue their crackdown on the misclassification of 1099ers and other types of ICs that legally should be treated as W-2 employees. Such businesses should also anticipate that plaintiffs’ class action lawyers will continue to target companies that fail to structure, document, and implement their IC relationships in a manner that complies with applicable IC laws.
What should companies that use ICs do, especially businesses in the on-demand, gig, and digital economies? As we have stated in other blog posts, businesses that utilize ICs would be wise to focus on enhancing their compliance with applicable IC laws. Businesses interested in enhancing their compliance with IC laws can do so in a variety of ways, as detailed in our White Paper on minimizing IC misclassification risks, including the use of IC Diagnostics™. This process assesses IC compliance under applicable law, restructures and re-documents the IC relationship in a more compliant manner, and then implements the IC relationship in a customized and sustainable fashion.
Written by Richard Reibstein