In August 2015, the North Carolina House of Representatives sent a bill to the Senate that would create an oversight board for employee classification.  See H.B. 482.  The Employee Fair Classification Act could significantly impact employers and workers in North Carolina.

The Employee Classification Division

The Act creates an Employee Classification Division within the Department of Revenue.  The Division would receive and investigate complaints of "employee misclassification," defined as an employer’s avoidance of tax liability by classifying an employee as an independent contractor.  Once the Division determines that a violation has occurred, it could assess civil penalties. 

The Act also requires the Employee Classification Division to coordinate information regarding reported misconduct among various state agencies, including the Department of Labor, the Division of Employment Security, and the Industrial Commission, for investigation of violations of each agency’s policies.

The Act largely describes the Employee Classification Division as a passive investigator of employee misclassifications that have been reported; however, some of the Act's language contemplates that the Division would affirmatively seek out misconduct.  For instance, the Division’s powers and duties include “develop[ing] methods and strategies for information sharing between State agencies in order to proactively identify possible instances of employee misclassification.”  H.B. 482, N.C. Gen. Stat. § 143-763(7).

Determining Whether an Independent Contractor is Actually an Employee

Once a potential misclassification has been reported or uncovered, the Employee Classification Division would consider ten factors to determine whether an independent contractor has been misclassified:

  1. Whether the individual is engaged in an independent business, calling, or occupation;
  2. Whether the individual is to have the independent use of his or her special skill, knowledge, or training in the execution of the work;
  3. Whether the individual is doing a specified piece of work at a fixed price or for a lump sum or upon a quantitative basis;
  4. Whether the individual is not subject to discharge because he or she adopts one method of doing the work rather than another;
  5. Whether the individual is not in the regular employ of the other contracting party;
  6. Whether the individual is free to use such assistants as he or she may think proper;
  7. Whether the individual has full control over such assistants;
  8. Whether the individual selects his or her own time, subject to customer requirements;
  9. Whether the individual has a substantial investment in any equipment or tools required to perform the contracted work; and
  10. Whether the individual has the opportunity for profit or loss.

H.B. 482, N.C. Gen. Stat. § 143-764(a)(1-10).  The presence of one or more factor does not create employee status, and all of the factors are not required to find employee status.

The Act states that these factors are “intended to codify the holding in Hayes v. Board of Trustees of Elon College, 224 N.C. 11 (1944).”  H.B. 482, N.C. Gen. Stat. § 143-764(c).  However, the House’s final version of the bill added factors 9 and 10 which were not included in Hayes

Civil Penalties

The Act sets civil penalties for employment misclassifications.  An employer is subject to a fine of up to $1,000 per misclassified employee in any three-year period.  The amount of each fine is determined on a case-by-case basis with a focus on the culpability of the employer.  An employer can appeal, either through the Office of Administrative Hearings or by filing a petition in Superior Court.  The appellate body will conduct a de novo review of the factual and legal findings.

In its present form, there are some ambiguities that will need to be addressed to appreciate the full reach of the Act. 

First, the Act may punish negligent misclassifications.  The opening clause to the civil penalties section punishes only willful conduct.  See H.B. 482, N.C. Gen. Stat. § 143-765(b) (“Any employer who is found by the Division to have engaged in willfulemployee misclassification …”) (emphasis added).  The same provision, however, states that the amount of the civil penalty depends on “the degree of willfulness or negligence.”  Id.  This difference will be critical for employers.

Second, the Act appears to give employers a free pass for the first violation.  The Act imposes liability only “after [an employer is] assessed any back taxes, wages, benefits, penalties, or other monies . . . as a result of misclassification.”  N.C. Gen. Stat. § 143-765(b).  Only then is the employer subject to fines, and only “for any future instances of employee misclassification.”  Id.  Employers would benefit from clarification that this provision exempts employers from any penalties unless and until they have first been assessed back taxes.

The Act gives employers get a brief amnesty period to report any existing violations.  Self-reported violations before October 1, 2016, will not result in any civil fines for employers.  The immunity would not extend to back taxes or other penalties.

The Act also would change the statutory framework of several licensing boards by requiring the boards revoke or deny licenses to applicants with employment misclassification civil penalties.  These changes impact licensing boards for general contractors, plumbers, heating contractors, fire sprinkler contractors, and electricians.  For a license to be denied or revoked, the violation must be willful and without a “good-faith argument that the individual was an independent contractor.”  H.B. 482, N.C. Gen. Stat. §§ 87-11, 87-23, 87-42. 

Violators will also be prevented from having any vendor contracts with the state.

Other Provisions

The Act specifically allows for information regarding reported violations to be shared with district attorneys; however, it does not include any criminal penalties for a violation.

The Act also repeals N.C. Gen. Stat. 97-5.1, which creates a rebuttable presumption that all taxicab drivers are independent contractors.

This article discusses the August 12, 2015, Fourth Edition of the bill.  Its provisions will likely change before this bill becomes law.