The Workplace Fraud Act of 2009
MARYLAND'sWorkplace Fraud Act of 2009, which became effective October 1, 2009, makes it illegal for employers in the construction and landscaping industries to classify workers as independent contractors when they are actually employees. Given the steep fines, tax, and other repercussions, employer awareness and compliance with the classification requirements are imperative. The Workplace Fraud Act should also serve as notice to other industries as similar changes are likely to come for them, especially in light of a July 14, 2009, Executive Order that established a task force whose recommendations may impact all businesses.
Why was the law enacted? The practice of misclassifying employees as independent contractors allows employers to significantly reduce payroll costs, denies workers certain workplace protections such as workers' compensation and unemployment benefits, and creates a competitive disadvantage for those employers who play by the rules. The practice also costs the State of Maryland and, ultimately the taxpayers, millions of dollars that would otherwise be earmarked for the Unemployment Insurance Trust and Maryland's general fund.
How can you ensure that your business is compliant? Under the new law, an individual is presumed to be an employee, unless the employer can demonstrate that:
- The individual is free from control and direction;
- The individual customarily is engaged in an independent business of the same nature; and
- The work is outside of the usual course of business of the employer or performed outside of any place of business of the employer. Work is "outside the usual course of business" if the individual performs the work off the employer's premises, performs work that is not integrated into the employer's operations, or performs work unrelated to the employer's business.
The following are some practical tips to help ensure that your workers are properly classified as independent contractors:
- When advertising for independent contractors, avoid placing "help-wanted" ads and avoid using phrases such as "wages" or "steady work."
- Avoid setting up a regular pattern or daily or weekly schedules for the contractor.
- If possible, compensate independent contractors on a per-job basis rather than hourly or weekly.
- Insist on receiving an invoice from the contractor before issuing payment, and make checks payable to a business entity rather than an individual.
- Require contractors to produce evidence that they have general liability insurance, and that they have satisfied their workers' compensation and unemployment obligations with respect to their own workers.
- Do not prohibit contractors from working for other employers at the same time.
What are the penalties for violating the law?
Employers who "knowingly" misclassify workers may be subject to a penalty of up to $5,000 per misclassified employee for the first violation, up to double the $5,000 penalty for the second violation, and up to $20,000 per misclassified employee for three or more violations. The law, however, does recognize that people make mistakes. If an employer "unknowingly" misclassifies an employee as an independent contractor, the law provides forty-five days for the employer to come into compliance or face a penalty of $1,000 per misclassified employee.
What should employers do?
Employers in the construction and landscaping industries should immediately determine whether their worker classifications are appropriate. If there is any doubt, the employer should seek legal counsel and consider reclassifying workers. Companies in all industries should also review their classification of workers in anticipation of this law or similar laws applying to more industries in the future.