Employers’ New Year’s Resolution: Review Employee v. Independent Contractor Classifications

by Poyner Spruill LLP
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As we enter 2014, employers should take the opportunity to review their classifications of employees and independent contractors to ensure they do not run afoul of the many overlapping statutes and regulations in this area. Both state and federal enforcement agencies, including the US Department of Labor (DOL) and the Internal Revenue Service (IRS), have increasingly focused on misclassification issues in recent years, and that trend will likely accelerate throughout this year. 

In addition to the DOL and IRS, the North Carolina Department of Revenue, North Carolina Industrial Commission, and North Carolina Employment Security Commission are interested in policing the employee/independent contractor classification. The consequences of misclassifying workers are substantial. Employers could be liable for unpaid payroll taxes, claims based on denial of employees' participation in benefit plans, and possible out-of-pocket liability for workplace injuries suffered by the worker due to the absence of coverage under a workers’ compensation insurance policy. 

We discussed an example of the increased focus in our previous Employer Alert, Independent Contractor Misclassification Bill Introduced in Senate, which analyzed the Payroll Fraud Prevention Act of 2013. That act, introduced into the U.S. Senate in November, aims to reduce the misclassification of employees as independent contractors by amending the Federal Fair Labor Standards Act to cover a group of individuals known as “non-employees.” The act would require all employers, even those that do not use independent contractors, to issue a notice for both “non-employees” and “employees.” The required notice must tell individuals how they are currently classified; provide contact information for a DOL website; and tell individuals they should be in contact with the DOL if they believe that they have been misclassified or have any questions. Substantial penalties would be available against noncompliant employers.

In a similar vein, in 2014, the DOL’s Wage and Hour Division may issue “Right to Know” regulations requiring employers to draft documents explaining to independent contractors why they are not classified as employees and to provide that analysis to the DOL. These regulations, if they are published and become effective, would create an additional administrative burden for employers and would also require employers to create documentation that could easily be used against them in misclassification lawsuits.

Finally, the Patient Protection and Affordable Care Act (commonly called the Affordable Care Act or Obamacare), creates additional misclassification risks for employers beginning in 2014 because it imposes penalties for failing to provide group health plan benefits to full-time employees.  This gives an employer a potential incentive to misclassify employees as independent contractors to avoid either the requirement to provide health benefits at all or to minimize the amount of penalty it pays.  Moreover, there is an argument that failing to provide required coverage to a worker by mislabeling him or her an independent contractor could make the employer liable for any medical claims that worker later makes.

Employers should become familiar with the criteria for distinguishing between employees and independent contractors and carefully analyze the relationships they have with workers before labeling them independent contractors. The start of 2014 is the perfect time for employers to conduct internal audits to ensure they have not incorrectly misclassified an employee as an independent contractor. When in doubt, employers should not hesitate to reach out to their employment counsel for advice and assistance in making classifications.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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