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Targeting Employee Misclassification

On April 22, 2010, Representative Lynn Woolsey (D-Cal.) and Senator Sherrod Brown (D-Ohio) introduced identical bills entitled the Employee Misclassification Prevention Act (“EMPA”) (H.R. 5107 and S. 3254), to target abuses of the employee/independent contractor classifications. 

Should EMPA become law, it will have an obvious, immediate impact on employers, not only under the wage-hour laws but others, including the tax code and National Labor Relations Act.  Its provisions create new protections and incentives for complaints of misclassification by workers (and unions seeking to broaden the “employee” workforce at a particular employer or in a particular industry), and, just as importantly, foster the exchange of information on alleged misclassifications among government agencies and departments. With these new potential tax and employment risks and consequences, the cost-benefit calculation for employers of using independent contractors in their business model could alter dramatically.

EMPA will create a significant increase in record-keeping burden on employers.  Employers currently are required by FLSA only to keep records pertaining to employees, but not individuals classified as independent contractors.  Employers would also be required to notify workers in writing of their classification as exempt or non-exempt and requiring employers to keep records reflecting the correct status of each worker as an employee and non-employee and specifically express that misclassification of workers is a violation of the Fair Labor Standards Act.

More daunting for employers are the enhanced penalties it would put in place for employers who misclassify their employees.  While per-employee violations have historically been available under the Fair Labor Standards Act, the DOL typically has not imposed such draconian penalties on good faith, first-time offenders.  Under this legislation, if an employer is found to have violated employees’ overtime or minimum wage rights by misclassification, civil penalties would be imposed of up to $1,100 per employee for first-time violators, and up to $5,000 per employee for repeat or willful violators.  Additionally, EMPA allows double liquidated damages for employers that fail to accurately classify an individual as an employee and violate the minimum wage or maximum hours provisions of the Fair Labor Standards Act.

Moreover, EMPA creates changes within the federal government designed to assist employees in bringing claims of misclassification.  An official DOL “employee rights website” would be created to explain to employees their rights and how to obtain additional information of their rights under state and local laws.  Importantly, the website will include a method for employees to file complaints online directly to the Wage and Hour Division of the DOL. 

Even more importantly, the bill fosters the exchange of information on alleged misclassifications among government agencies and departments.  The DOL is directed to perform targeted audits focusing on employers in industries that frequently misclassify employees and allows the DOL and the IRS to refer incidents of misclassification to each other.  Also in this regard, the legislation mandates that states report the results of state auditing and investigative procedures with respect to indentifying employers that may have excluded employees from unemployment compensation coverage and directs the states to enhance their own penalties for worker misclassification.  If enacted, the changes significantly enhance the enforcement of the federal law and strongly encourage enhanced penalties on both the state and federal levels. 

Finally, historically independent contractors and other non-“employees” have not been protected by the anti-retaliation provision of the Fair Labor Standards Act.  This legislation expands the anti-retaliation provision beyond the traditional definition of employee to cover independent contractors. With the new potential tax and employment risks and consequences imposed by EMPA, employers are encouraged to reconsider whether the benefits of classifying individuals as independent contractors within their business model is truly worth the potential liability in a regulatory culture evolving toward strict enforcement.

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