Most employers are familiar with legal issues surrounding the classification of workers as employees or independent contractors. Until recently, these discussions centered primarily around the decision on how a worker should be classified. Based on recent legislation in North Carolina, however, that conversation is shifting to account for the greater potential fallout from worker misclassification.

On August 11, 2017, Governor Roy Cooper signed the Employee Fair Classification Act into law. The primary focus of the Act is increased information sharing, both to government agencies and workers. The Act does not change the definitions of an “employer” or “employee” under any existing North Carolina law.

The Act creates a new system to report, investigate, and disseminate information about employee misclassification. The legislation establishes a new division of the North Carolina Industrial Commission called the “Employee Classification Section” to receive and investigate misclassification claims.

The new Section essentially acts as a clearinghouse for misclassification reports. When the Section receives a report of misclassification, the law requires it to forward that information to state agencies that may have an interest in the matter. This can include, among others, the Department of Labor, the Division of Employment Security, the Department of Revenue, and the Industrial Commission. The Section is also authorized to share information with federal agencies, such as the Wage and Hour Division of the U.S. Department of Labor.

This reporting aspect of the Act dramatically increases the scope of potential fallout from even one instance of employee misclassification. Now, a single report of misclassification is more likely to result in investigations by multiple state (and potentially federal) agencies, with a corresponding increase in expense. Additionally, employers requiring state licensure will be required to report employee misclassification investigations on application documents, which could potentially affect their ability to conduct business in North Carolina.

Under the Act, workers will also receive additional information regarding the employee/independent contractor distinction. The new law requires employers to display another poster, which will contain information on employee classification, as well as how and where to report any misclassification claims. It can reasonably be anticipated that this will also yield an increase in allegations of worker misclassification.

These provisions of the Act become effective on December 31, 2017. Before that deadline, North Carolina employers should evaluate any questionable worker classifications. Although South Carolina does not currently have an equivalent statute, the potential penalties for misclassification there merit careful consideration as well.