New York employers will face greater scrutiny for those individuals they classify as independent contractors, after it was announced this week that New York and the U.S. Department of Labor have agreed to coordinate efforts and share information with respect to employee misclassification.

Generally, unlike an employer’s traditional employees, independent contractors are free from supervision, direction, and control in the performance of their duties.  Independent contractors are in business for themselves and offer their services to the general public, as opposed to a single employer.  More specifically, other indicia of an independent contractor include adverting their services, using their own business cards and stationery, carrying their own insurance and paying their own expenses, maintaining an independent place of business, assuming risk for profit or loss, setting their own schedule, and retaining the right to refuse work.  Individuals operating as independent contractors are not necessarily entitled to, for example, unemployment benefits, overtime pay, and family/medical leave.  Thus, some employers may attempt to classify traditional employees as independent contractors to avoid the costs related to these benefits.

Disputes over possible employee misclassification commonly arise after the relationship between an employer and an independent contractor comes to an end, and the individual applies for unemployment benefits, which is then opposed by the employer.  Now, however, the shared information and coordinated efforts between the U.S. Department of Labor and states such as New York likely will lead to more proactive investigations into and prosecutions of employee misclassifications.  Whereas in the past the U.S. Department of Labor was able to recoup only a small fraction of back pay and benefits, cooperation between states and the federal government has resulted in nearly $18.2 million in back pay for approximately 20,000 misclassified workers in the last two years.  In addition to New York, the Department of Labor has similar agreements with 14 other states, including Connecticut.

This development raises the risk for employers who pay insufficient attention to the liability that can arise from employee misclassification. Many states in addition to New York are not only sharing information, but they also are actively pursuing non-compliance as a means of increasing revenues, and intensifying coordination and cooperation between various state agencies that have an interest in this issue.   Thus a misclassification claim arising out of an unemployment compensation dispute (based upon claimant alleging that he or she has been wrongfully classified as an independent contractor) can trigger state and federal income tax audits, assessments for failure to have workers’ compensation coverage in place, and sundry other investigations.  It is not inconceivable for a misclassification of a single employee to generate liability and penalties in the range of six figures.