Congress has reintroduced legislation that could put businesses employing independent contractors on the hook for hefty “payroll fraud” fines. The Payroll Fraud Prevention Act of 2013, co-sponsored by Ohio Senator Sherrod Brown, was introduced to a Senate subcommittee earlier this month. The bill is yet another effort to introduce legislation at the federal level dealing with the issue of misclassification of independent contractors.
The bill comes in the wake of a continued crackdown by the Department of Labor and the IRS on businesses that misclassify independent contractors. The legislation would impose stiff fines not just for misclassification, but also for not following certain notice requirements. What’s more, even a good faith misclassification would still constitute a violation.
The Payroll Fraud Prevention Act would make it a federal labor offense for employers to misclassify individuals who are truly employees as independent contractors, and it would expand the Fair Labor Standards Act to cover non-employees, making it a prohibited act to wrongly classify an employee as a non-employee.
Stringent notice requirements also included in the bill would require businesses to provide workers performing labor or services with written notices indicating whether they have been classified as employees or non-employees. The notices must also direct workers to the Department of Labor’s website for information about employees’ rights under the law, and specifically inform them that they should contact the Department of Labor if they suspect they have been misclassified. These notice requirements would apply to all businesses, including those that do not use independent contractors and those whose independent contractors are properly classified. The penalty for violating the notice requirements would be hefty: $1,100 for the first offense and up
to $5,000 for a subsequent offense or a willful violation for each employee or independent contractor who did not receive the required notice. Simply put, the impact to large employers could be staggering.
The employer would face more than a monetary penalty for failing to give the required notice; failure to do so would also create a presumption that the non-employee is actually an employee of the business, which could only be rebutted by clear and convincing evidence that the individual is not an employee.
If an individual is found to be improperly classified as an independent contractor, the bill would impose triple damages for willful violations of minimum wage or overtime laws.
Further, the new bill would authorize the Secretary of Labor to impose additional penalties upon employers who misclassify employees for unemployment compensation purposes, authorize the Department of Labor to report misclassification information to the IRS, and direct the Department of Labor to conduct targeted audits of industries with “frequent incidence” of misclassification.
While the bill is still in its infancy, it represents just the latest attack by the federal government on this issue, and demonstrates the ever-increasing need for employers to take a tough look at how they utilize and classify independent contractors.