The Payroll Fraud Prevention Act first introduced in 2011 has once again been placed on the U.S. Congress’s agenda for 2014. The proposed legislation seeks to expand the Fair Labor Standards Act; currently the FLSA’s mandate is limited to minimum wage, overtime and child labor laws. The bill’s goal is to cover misclassification of individuals as independent contractors rather than employees and to create a new definition of “non-employee” workers who must receive written notice to that effect. Of course, it contains penalties for misclassification of up to $5,000 per worker for each genre of violation. Additionally, it would impose recordkeeping requirements on businesses---ALL BUSINESSES-not just those which purport to have independent contractors in their workforce. The bill’s sponsors act on the following assumption, which can best be expressed as a mathematical equation:
INDEPENDENT CONTRACTOR MISCLASSIFICATION=PAYROLL FRAUD
As a specialist in classification cases, I can honestly say that some misclassifications are blatant and intentional, but most stem from three purely innocent bases: (1) misunderstanding as to the technicalities; (2) change in the actual relationship between the putative employer and the contractor which is not reviewed by employment law counsel and continues in error; (3) utter confusion based on the variant standards imposed by agencies at every level of government. It is my personal peeve that these differ and that the agencies are quite cavalier about setting their own rules, which contradict those of other regulatory bodies! Honestly, they make up and change the rules at will to suit their political and fiscal imperatives. It is an extremely frustrating landscape in which to operate.
The bill would create a presumption that a non-employee is an employee if the business fails to provide the appropriate notice or does not do so in a timely fashion and turns the burden of proof onto the employer, permitting rebuttal by clear and convincing evidence.
There are other, serious elements of the legislation. It would pierce the corporate veil, meaning that the government would ignore a corporate entity established for the purpose of providing services if it was created as a condition of the relationship. It would impose treble damages for willful violation of the minimum wage or overtime laws (the standard in most states is currently liquidated damages equal to double the amount due), create a US Department of Labor misclassification website, authorize disclosure of misclassification information to the IRS (this is already covered by a Memorandum of Understanding), and provide for directed audits, meaning that industries with a high incidence of misclassification would be targeted.
Notwithstanding the absence of specific misclassification legislation at the national level, this issue has been the focus of serious state crackdowns as well as class action lawsuits brought by plaintiffs’ counsel. Each has the power to decimate businesses! I know that many clients try to deal with this problem by, frankly, not dealing with it at all until the auditor comes calling and that is much too late in the game. And, inevitably, they blame their accountants, usually after disregarding their recommendations!
Reclassification, better contracts, extreme documentation, and modification of relationships---all are tools in my armamentarium to mitigate my clients’ exposure on every level. Classification law is definitely not a one-size-fits-all garment. Every business circumstance is unique and requires an individualized approach.
Hon. Ruth B. Kraft chairs the Employment Law Group at the Garden City, New York firm of Kirschenbaum & Kirschenbaum. For five years, she specialized in misclassification cases and is the author of notable New York State decisions in a variety of industries.