Last month, major North Carolina newspapers ran a series of investigative reports alleging that construction companies with federal contracts routinely misclassify employees as independent contractors. While these articles have raised the profile of this legal issue, they are by no means the only form of scrutiny being placed on employee misclassification.

Over the past several years, the federal Department of Labor has entered into a series of Memoranda of Understanding (MOU) with their state agency counterparts. The purpose of the MOU is to share information when one of the agencies determines that an employer in that state has misclassified employees as independent contractors. This misclassification raises a range of both federal and state legal liabilities, including Workers’ Compensation coverage, withholding taxes and matching payroll contributions, and workers’ eligibility to participate in the company’s benefits plans.

By sharing information, a targeted inquiry based on one of these areas of compliance could spiral into a more systemic investigation of the company’s classification processes, and proceedings seeking damages and penalties on multiple federal and state legal grounds. If the company is also a federal contractor, it could eventually face debarment proceedings based on complaints to a state agency about misclassification.

Neither North Carolina nor South Carolina have entered into a MOU with federal DOL to date, but both agencies can be expected to consider such an arrangement as the focus on this legal issue sharpens. Employers with workers classified as independent contractors need to make certain that they have thoroughly analyzed these classifications under the relevant state and IRS guidelines, and that they are prepared to legally defend their classification choices in the face of a challenge by state and/or federal agencies.