Why it matters: Employers have faced a tidal wave of litigation over the alleged misclassification of employees as independent contractors, with workers ranging from FedEx drivers to National Football League cheerleaders challenging their status. Now employers should brace themselves for similar actions from state regulators. The Department of Labor (DOL) announced the award of more than $10 million in grants to 19 states – including California and New York – to “enhance states’ ability to detect incidents of worker misclassification” while “ensuring workers receive appropriate rights and protections,” Labor Secretary Thomas E. Perez explained. Several states have existing programs designed to reduce worker misclassification, the DOL noted, but this is the first time the agency has awarded grants dedicated to the effort. Facing the threat of action from plaintiffs’ attorneys as well as federal and state authorities, employers should take the time to ensure that workers are correctly classified, remembering that the question of whether a worker is an employee or independent contractor requires a multifactor analysis of issues such as the amount of control an employer exercises over the worker and whether the worker performs work customarily performed by the employer.

Detailed Discussion

Independent contractor or employee? The question has cost some employers millions of dollars, and the scrutiny only looks to be increasing.

A total of $10.2 million was awarded by the DOL to 19 states “to implement or improve worker misclassification detection and enforcement initiatives,” the agency announced. The funds will be used “to increase the ability of state unemployment insurance tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report the wages paid to workers at all.”

The states receiving money – California, Delaware, Florida, Hawaii, Idaho, Indiana, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oregon, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin – will put it to use by enhancing employer audit programs and conducting employer education initiatives, the DOL said.

Four states (Maryland, New Jersey, Texas, and Utah) will receive shares of an additional $2 million in grant funds for “high-performance bonus” programs for detecting incidents of worker misclassification.

The maximum grant available was $500,000. While many states have programs in place designed to combat worker misclassification, the grants mark the first time the DOL has awarded money earmarked for the effort, funded by the Consolidated Appropriations Act of 2014.

Misclassification has been an action item for the DOL, with the agency reaching deals with various state labor departments to share information for joint enforcement efforts. Most recently, the DOL and the state of Alabama signed a memorandum of understanding, adding it to the list of states such as California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah, and Washington that have promised to work together with the feds to battle misclassification.

Legislators have also gotten into the act, with the introduction of the Payroll Fraud Protection Act, a bill that would “hold employers accountable” for misclassification by establishing it as a violation of the Fair Labor Standards Act.

Pursuant to the bill, employers would be required to provide notice to all employees of their status as either an employee or independent contractor, direct them to a DOL site for more information about their rights, and provide contact information for the agency if the employee “suspects [they] have been misclassified.”

If the employer fails to provide such notice, the legislation creates a presumption that a worker is an employee. Civil penalties are available for violations of the law, ranging from $1,100 for a first offense up to $5,000 for a second or willful violation.