Earlier this year, the U.S. Department of Labor (DOL) announced its 2015 Misclassification Initiative aimed at combatting misclassification of employees as independent contractors. At the top of its target list? Employers in the construction industry.
Misclassification of employees as independent contractors has been a focal point throughout the Obama administration, with the DOL being the main tool of investigation and enforcement. Misclassification occurs when an employer improperly classifies an individual as an independent contractor when the individual should have been classified as an employee, allowing the employer to avoid the expenses associated with employees. Employers who misclassify individuals as independent contractors face potential liability for various unpaid employee expenses such as payroll taxes, workers’ compensation and unemployment insurance premiums, and even minimum wage and overtime payments, which are not owed to independent contractors.
The DOL has been working on its Misclassification Initiative for several years now. The main goal of the Initiative is to crack down on businesses that have a high number of independent contractors, and each year the DOL announces new focus areas. For the 2015 Misclassification Initiative, the DOL has identified the construction industry as one of its top priorities. To put the importance of this targeting into perspective, in 2014, out of all businesses audited for misclassification, more than 80% were in one of the priority industries identified by the DOL. The DOL has stated that its targets for investigating employers in the priority industries in 2015 and 2016 are 84% and 86%, respectively.
To help reach its goals, the DOL has partnered with state agencies to help identify and investigate potential violators. In 2011, Maryland was one of the first states to partner with the DOL when its Department of Labor, Licensing and Regulation (DLLR) signed a memorandum of understanding (MOU) joining the Misclassification Initiative. Under the MOU, any information gathered during an audit by the DOL or the DLLR would be shared with the other agency and any violators would be subject to fines under both Maryland and federal law. Maryland is second only to Texas in the amount of funding it receives from the federal government in conducting misclassification audits.
Current statistics show that 79% of businesses that are audited for misclassification are found to be in violation and are issued fines, which can reach up to $5,000 per misclassified employee. In addition to fines, employers who are found to be out of compliance must pay back payroll taxes (both the employee and employer portion), plus unemployment insurance, workers’ compensation insurance, overtime wages, and interest.
To be prepared in case an auditor come knocking, employers should take stock of the individuals whom they have classified as independent contractors and evaluate whether they have been properly classified. There are a number of signs that an individual has been misclassified:
- The individual is compensated in a way other than on a per-project basis. Payment by the hour is particularly suspect;
- The employer grants the individual paid vacation or sick leave;
- The employer reimburses business expenses incurred by the individual;
- The type of work performed by the individual is typically paid by the employer on a W-2 basis; or
- A non-compete agreement is in place, which typically is not used for independent contractors.
If an employer determines that an individual has been misclassified, it can reclassify the individual as an employee and make them whole with back pay. Where the misclassification issue is particularly egregious, an employer may even want to consider self-reporting the issue, particularly if the employer is a state or federal contractor. State and federal contractors are required to comply with state and federal wage and hour laws, and failure to do so could result in loss of a contract and possible debarment. Self-reporting a misclassification issue could help to avoid this outcome.