Ignoring the risks of independent contractor misclassification may become more costly for employers under a bill introduced this month by U.S. Senator Bob Casey (D-PA). The Payroll Fraud Prevention Act of 2013 (S. 1687) (PFPA) would carry significant penalties for misclassifying employees as independent contractors, a practice the bill's sponsors deem "payroll fraud."

The bill is part of a targeted initiative by the current administration to eliminate worker misclassification. According to the bill's sponsor, in addition to being "payroll fraud," worker misclassification evades tax laws and deprives workers of benefits and legal protections. 

One of the more significant provisions of the bill imposes penalties on employers even if they demonstrate that misclassification was due to an innocent mistake. The law would pose a formidable obstacle for employers because the analysis of whether a worker is an independent contractor is highly fact specific, and case law is far from clear. Proper worker classification analysis is typically complex and dependent on a host of factors regarding the type of services the worker performs and the degree of oversight exercised by the employer.

Key Provisions of the Bill

Notice Requirements

The PFPA would require employers to provide every worker with a notice stating whether the person was classified as an employee or independent contractor. The notice would refer workers to the Department of Labor's website and its local office for questions about legal rights regarding misclassification.

Employers would have six months from the law's enactment to provide all current workers with the notice. New workers would receive the notice upon hire or commencement of services as an independent contractor.

If an employer fails to provide timely notice, the worker would be presumed to be an employee. Employers who miss the deadline would be required to provide "clear and convincing evidence," a demanding standard of proof, that the worker is not an employee.   

Targeted Audits

The bill also would provide for targeted audits of employers in "certain industries" that are believed to be misclassifying workers as determined by the Department of Labor's Wage and Hour Division (WHD). Employers who fail to report wage payments to avoid paying unemployment compensation would be subject to administrative penalties.

The administration would further increase enforcement by requiring every unit of the Department of Labor to report potential misclassifications discovered in connection with other matters to the WHD. The WHD would be authorized to report violations to the Internal Revenue Service for investigation of tax violations typically associated with worker misclassification.

Monetary Penalties

  • $1,100 fine per worker for misclassifications
  • $5,000 fine per worker for repeat or intentional misclassifications
  • Triple damages for intentional violations of wage and hour, minimum wage and notice requirements 

Implications for Employers

Employers have faced a sharp increase in wage and hour claims over the last decade, including a rise in collective actions. That trend shows no signs of slowing. If the Senate bill becomes law, employers will be subject to increased scrutiny to ensure they properly classify their workforce. Even if the bill is not enacted, the crackdown on worker misclassification is likely to remain on the rise for the foreseeable future.

Numerous federal and state agencies investigate classification issues and pursue penalties against employers under existing legislation, and individual workers can bring claims under existing laws, too. The PFPA would represent another independent source of liability and also enable greater coordination amongst federal agencies enforcing existing laws. 

Inadvertent worker misclassification is not uncommon, and workers' duties and oversight (and thus their proper classification) can evolve over time. To minimize the ever-mounting risks of noncompliance, employers should proactively and periodically review the work performed by all workers classified as independent contractors.