The 2009 session of the Maryland General Assembly was an active one. Among the changes enacted were a clarification to the Flexible Leave Act and sweeping new requirements imposed upon the construction and landscaping industries’ use of independent contractors. While neither bill has yet been signed by the Governor, both passed by wide margins and are likely to be signed by the Governor.
Maryland Flexible Leave Act Fixes
During Maryland’s 2008 legislative session, the Flexible Leave Act was enacted. The Flexible Leave Act requires an employer with 15 or more employees to allow any employee to use “leave with pay” for the illness of the employee’s immediate family. Employers raised concerns over the lack of clarity of key terms of the 2008 legislation. The changes enacted by the legislature are intended to provide greater clarity to key terms the Act. The changes will be effective immediately upon the signature of the Governor.
One source of confusion was the type of leave employees could use under the Act for the illness of a family member. “Leave with pay” covered by the Act now has been defined to include sick leave, vacation time, paid time off and compensatory time. Benefits provided pursuant to a plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), including long term or short term disability have been specifically excluded from covered “leave without pay.”
Immediate family has been defined to include only a child, spouse or parent. Parent means, exclusively, an adoptive parent, biological parent, foster parent, a stepparent, a legal guardian or a person standing in loco parentis. Child has been defined to mean an adopted child, biological child, foster child, a stepchild, or a legal ward who is either under 18 or over 18 and incapable of self care due to a mental or physical disability. As originally enacted, immediate family, parent and child were left undefined, leaving employers without a clear understanding of the scope of their obligations under the Flexible Leave Act.
Notably, the Flexible Leave Act is not intended to extend the period of leave under the Family and Medical Leave Act and is not intended to require employers to provide employees any type of leave with pay. Rather, the Act only requires that employers allow employees to use leave with pay granted to them for the illness of a family member. If the illness is covered by the FMLA, leave under the Flexible Leave Act will run contemporaneously with the FMLA leave. However, it is important to note that the purposes for which an employee may take leave under the Flexible Leave Act are broader than the purposes for which an employee may take leave under the FMLA. Consequently, an employee’s entitlement to use paid leave under the Maryland Act does not necessarily mean the use is also FMLA leave.
New Independent Contractor Requirements for the Construction and Landscaping Industries
In a bill entitled the Workplace Fraud Act of 2009, the General Assembly set forth standards for determining whether individuals hired by employers in the construction and landscaping industries are independent contractors. Broad recordkeeping requirements are also imposed by the Act. Employers engaged in construction are defined broadly to include any employer engaged in services provided relating to real property, including building, reconstructing, improving, enlarging, painting, altering, maintaining and repairing. Landscaping includes garden maintenance and planting, lawn care, seeding and mowing of highway strips, sod laying, turf installation, ornamental bush planting, pruning, bracing, spraying, removal, and ornamental tree planting, pruning, bracing, spraying and removal.
The Act requires employers to properly classify an individual as an employee or independent contractor and sets forth potentially severe penalties for improperly classifying an individual as an independent contractor. Of central importance is the Act’s creation of a presumption that an individual is an employee unless the individual meets the one of the tests for independent contractor status set forth in the Act. The burden is placed upon the employer to establish that an individual is an independent contractor.
As originally drafted, the bill would have dramatically changed the ability of employers to retain independent contractors, including an unworkable requirement that contractors could not perform work in the same “course of business” as the employer hiring them. An exception to that requirement was added to the final version of the Act, which provides that an employer, by contract, may engage another business entity, which may have its own employees, to do the same type of work in which the employer engages without establishing an employer-employee relationship between the two entities. Under this exception, employers should be able to continue to subcontract work to other business entities without establishing an employer-employee relationship with the employees of the subcontractor.
Two other exceptions to the presumption of employee status were included in the final version of the Act. The first, the exempt person exception, was originally entitled the sole proprietor exception. An exempt person is an individual who performs services free from the direction and control of other parties (the party for whom the services are performed may specify the desired result); furnishes the tools and equipment necessary to provide the service; operates a business that is considered inseparable from the individual for profits and liabilities (or is sole owner of a corporate entity to which sole unlimited personal liability does not apply); exercises complete control over the operation of the business; has the right and opportunity to perform services for multiple entities at the individual’s discretion; and employs no individuals other than the individual’s spouse, children or parents. An additional exception to the assumption of employee status exists. However, its requirements may prove to be much more difficult to establish than the other two exceptions. These requirements include that the contractor be completely “free from control and direction” over work performance; that the contractor be “customarily engaged” in an independent business or occupation of the same nature as that involved in the work; and the work is “outside the usual course of business” of the person for whom it was performed or performed outside that person’s place of business.
Although some uncertainty exists as to how courts will interpret the Act, the good news appears to be that the exceptions discussed above, when viewed collectively, should not significantly alter current law regarding the use and classification of independent contractors. As described below, the bad news is that Maryland’s ability to investigate and penalize employers for misclassifying employees, and the records employers will be required to keep, have been significantly increased.
The Department of Labor, Licensing & Regulation (“DLLR”) will investigate alleged improper classifications by entering a business or work site to observe the work being performed, by interviewing individuals, and by reviewing and copying records. The investigation may be initiated as the result of a complaint, upon the DLLR’s own initiative, or upon referral from another state agency. Thus, the Act appears to leave open the possibility of random compliance inspections such as those conducted under occupational safety and health law. If the DLLR determines that an employee or employees have been misclassified, the DLLR may issue a citation to the employer detailing the violation alleged as well as the proposed civil penalty. The employer has 15 days to request a hearing on the citation and proposed penalty. If the employer fails to request a hearing within 15 days, the citation as well as the penalties become a final order of the DLLR. Any hearings are conducted by the Office of Administrative Hearings. Decisions of the Office of Administrative Hearings may be appealed to the court system. In addition, if the DLLR determines that an employer improperly classified an individual as an independent contractor, the DLLR is required to notify Maryland’s Comptroller, the Office of Unemployment Insurance, the Insurance Administration and the Workers’ Compensation Commission. These agencies could launch separate investigations and propose separate penalties or assessments against the employer for failing to properly classify individuals as employees.
The DLLR may seek various types of relief, including requiring the employer to come into compliance with all applicable laws including income tax withholding, unemployment insurance, and workers’ compensation as well as providing up to twelve months restitution to the misclassified individual. However, the Act allows such restitution to be sought for a maximum of a 12 month period. In addition, the DLLR may seek a civil penalty of up to $1,000 for each employee who has been misclassified. This amount is increased to up to $5,000 for each employee who has been improperly classified if misclassification is knowing. When an employer has been found in violation of the Act on three or more occasions, the DLLR may seek penalties of up to $20,000 for each employee subsequently misclassified.
The Act also allows an individual to bring a claim in court for economic damages based upon an individual’s misclassification so long as the DLLR has not brought a completed action against the employer. The Act provides for an award of attorneys’ fees and liquidated damages up to three times the economic damages awarded to an employee.
The effective date of the Act will be October 1, 2009, assuming the Governor signs the bill. At that time employers, when classifying an individual as an independent contractor, must provide the individual with written notice of the classification at the time the individual is retained. This written notice must include an explanation of the implications of the individual’s classification as an independent contractor rather than an employee, and must be provided in both Spanish and English. Employers must also maintain “evidence” that an individual who is not an employee has been properly classified.
Finally, the Act requires employers to maintain and retain a range of other records related to the classification and hours of work of both employees and independent contractors for three years. While some of the records the Act requires are already maintained by employers, the requirement that employers track the hours of independent contractors and exempt employees presents potentially troubling administrative problems. Further, tracking the daily hours of work of independent contractors as required by the Act must be approached with caution because tracking hours of work of independent contractors in fundamentally in conflict with the nature of the independent contractor relationship. When requiring independent contractors to provide their daily hours of work, employers should make extremely clear, in writing, that such information is being collected solely for the purpose of complying with Maryland law. Similarly, when tracking the hours of work of exempt employees, employers should ensure that they do not take any action which jeopardizes exempt status of these employees, such as making partial day pay deductions based upon hours worked.