North Carolina Governor Bev Perdue has issued an Executive Order establishing the Governor’s Task Force on Employee Misclassification. The Task Force’s mission is to assure workers who are employees are treated as such by their employers. Executive Order No. 125, issued August 22, 2012, sets up a 16-member group, chaired by North Carolina Insurance Commissioner Wayne Goodwin, to formulate ways to combat the practice of employers misclassifying employees as independent contractors in North Carolina. Other members of the Task Force include the Secretary of the Department of Revenue, Secretary of the Department of Commerce, Assistant Secretary of the Division of Employment Security, the Commissioner of Labor, the Attorney General, and the General Manager of the North Carolina Rate Bureau, among others.  

One of the specific duties placed on the Task Force in the Executive Order is to:  

Identify ways to increase the filing of complaints by employees and other members of the public against noncompliant employers, including a simplification of the process by which workers can report suspected violations of the laws.

Wasting no time, the Task Force held its first meeting in September 2012 with the intent of issuing recommendations in 2013. Insurance Commissioner Goodwin asked Task Force members to contact representatives from Ohio, Florida, Texas and New York to find out how regulatory officials coordinate communication between agencies to identify offenders. In a letter to Task Force members, Insurance Commissioner Goodwin on October 3 wrote, “Please identify any barriers that you believe may inhibit your agency’s ability to share information and most importantly, proposed actions to overcome those barriers.”  

Government focuses on misclassification for two major reasons: 1) to stop the loss of state payroll tax dollars as a result of fewer employees being reported; and 2) to assure workers’ compensation insurance coverage for misclassified employees. Although the State of North Carolina has not published estimates, the Internal Revenue Service estimates that misclassification deprives the federal treasury of $2.7 billion a year in unpaid tax revenue. The increased communication and cooperation between the State agencies likely will increase audits and enforcement action focused on independent contractors.

North Carolina employers should consider taking steps now to evaluate, identify and correct any misclassification issues. Jackson Lewis attorneys are prepared to assist. The following best practices should be considered also:

  • Conduct an audit of any individuals classified as independent contractors.
  • Follow these criteria to establish and maintain independent contractor status:
    • Explain the result desired from the work but do not control the manner and means by which it is accomplished.
    • Utilize the independent contractor in roles and on projects that are not performed typically by employees.
    • Have a written agreement.
    • Do not terminate independent contractors; end their contract.
    • Do not allow independent contractors to use your internal administrative staff.
    • Do not refer to independent contractors as employees and do not include them in company events where employees are typically invited.
    • Use a performance-based or project-based compensation structure.
    • Allow the independent contractors to use assistants that they select and hire.
    • Remind the independent contractors of their ability to perform work for other companies.
    • Within certain limitations, allow independent contractors to set their own hours.
    • Do not provide the same training to independent contractors that employees receive.
    • Have independent contractors keep track of their time under their own system and have them send invoices for their work.
    • Have the independent contractor supply their own tools and equipment.
    • Make the independent contractors responsible for their own expenses or pay pursuant to contractual arrangement on invoice.  

North Carolina has sent a clear message: it is prepared to eradicate the misclassification of employees as independent contractors in the state. Now is the time to evaluate and correct any potential problems.