On October 2, 2014, the Alabama Department of Labor and the U.S. Department of Labor (DOL) entered into a formal Memorandum of Understanding (MOU) or agreement to share information regarding independent contractor misclassification. In signing this MOU, Alabama joined several other states that have already entered into similar MOUs with the DOL, including California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah, and Washington.

This latest MOU comes on the heels of the DOL’s September 15, 2014, award of $10.2 million to 19 different states to implement and improve misclassification detection and enforcement in unemployment insurance programs, with the largest potential awards going to Texas, Maryland, New Jersey, and Utah. The states selected will reportedly use these grant monies for various improvements and initiatives, including enhanced audit programs and employer education initiatives. In most states, tax audits into independent contractor misclassification are automatically triggered when an independent contractor files for unemployment. Because these tax audits are often conducted on a class-wide basis, they can quickly result in a large bill for unpaid taxes, penalties, and interest against the offending company.

Independent contractor misclassification has been on the forefront of the DOL’s initiatives, with the fiscal year 2015 budget specifically allocating $14 million to be used to combat misclassification. This amount includes $10 million for grants to states to identify misclassification of employees as independent contractors and $4 million for enforcement by the DOL’s Wage and Hour Division. In addition to the coordinated information-sharing between the DOL and these states, the DOL has also committed to working closely with the U.S. Department of the Treasury to conduct targeted wage and hour investigations in industries with the “most substantial” independent contractor abuses. The DOL has been successful in these initiatives, recovering over $1 million in back wages as damages against a cable installer in May of 2013 and multiple other six-figure awards against companies in the construction and janitorial industries, among others.

With these increased federal and state enforcement efforts, along with increased private class and collective action lawsuits challenging independent contractor misclassification, now is the time to closely review any independent contractor relationships you may have. While the test used to determine independent contractor status typically varies depending on the context, each test focuses on the same general factors, including whether the independent contractor:

  1. has the right to control the manner, method, and means of performance;
  2. can be discharged at will;
  3. is performing an integral function of the business;
  4. supplies the equipment necessary to perform the job;
  5. has entrepreneurial opportunity for profit or loss; and
  6. is performing work requiring significant use of skill.

When assessing your independent contractor relationships, it is important to carefully review any independent contractor agreements to ensure they contain the key provisions necessary to establish an independent contractor relationship. A careful review of benefits plans is also highly recommended to ensure independent contractors are properly excluded from the plan’s definition of “eligible employee” or “participant.” It is even more important, however, to take a close look at the company’s day-to-day practices involving independent contractors (ideally under the attorney-client privilege)to ensure that they are consistent with a true independent contractor relationship.

If significant issues are discovered, reclassification of these individuals may be recommended. Alternatively, implementing various steps to strengthen the independent contractor relationship may be possible. In either event, any such steps should be planned and implemented very carefully, because, if handled incorrectly, significant liability can result.