North Carolina Governor Signs Law Creating Division to Investigate and Prosecute Employee Misclassification Claims

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In 2015, a Raleigh newspaper ran a series of investigative articles focused on construction industry members that classified a large portion of their workers as independent contractors instead of employees. The articles alleged that this classification was intended to avoid costs associated with unemployment, Workers’ Compensation, tax, wage payment, and other laws applicable to employees. The newspaper claimed that state enforcement agencies did not have the resources or coordination in place to successfully pursue claims made by misclassified employees.

In response to this series, the North Carolina General Assembly began considering legislation intended to deter companies from misclassifying persons who should be designated as employees. This effort has been supported by members of the construction and other industries who claim that they have been placed at a competitive disadvantage by companies who reduce their labor costs through misclassification schemes.

On August 11, Governor Roy Cooper signed into law legislation intended to address these concerns. The Employee Fair Classification Act does not change the legal definition of employees under state law. Instead, it creates a new division within the state Industrial Commission charged with coordination and prosecution of misclassification complaints. The division will report complaints to a variety of state administrative agencies involved with misclassifications, including tax, wage and hour, unemployment, and Workers’ Compensation authorities. This means that a single worker complaint on one of these bases may trigger a multi-pronged investigation of the company’s labor practices.

In addition, the new division will collect and publicize information regarding the definitions of employees and independent contractors under North Carolina law. While the legislation was prompted by labor practices within  the construction industry, it will impact a wide range of North Carolina businesses. Many companies mistakenly believe that a worker who prefers to be paid as a contractor can waive his or her right to coverage under the state’s employment laws. True independent contractors are limited to workers with a high degree of control over the means and methods by which the work is accomplished. Workers are legally presumed to be employees unless this strict test is met by the company.

North Carolina companies using contract labor should carefully review the basis for their classifications and conclusions that the contractors meet this legal test. Under this new law, employers that misclassify their workers will face an increasing chance of multiple government investigations and the costs, legal expenses, and disruption that accompany such claims.

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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