4. Trends and Specific Cases
a. New or Expected Developments
Federal and state enforcement activity and private litigation concerning independent contractor misclassification remain ongoing.
Increased Internal Revenue Service Enforcement and Voluntary Settlement Programs
The IRS administers a Voluntary Classification Settlement Program (“VCSP”), allowing employers to voluntarily reclassify workers previously treated as independent contractors without incurring tax obligations or penalties for past misclassifications. Under the VCSP, employers receive relief from certain federal employment tax liabilities in exchange for payment of 10% of the employment tax liability for misclassified workers for one year. Interest and penalties are waived. To be eligible to participate in the VCSP, an employer must, among other matters, have consistently treated the affected workers as non-employees in the past and have filed the required Forms1099 for these workers for at least the previous three years.
Stepped-up Interagency Cooperation
In September 2011, the United States Department of Labor entered into a Memorandum of Understanding (“MOU”) with the IRS allowing for information sharing and coordination in misclassification enforcement matters.
Several states have likewise formed interagency and joint task forces to combat the perceived misclassification problem. The task forces are generally responsible for facilitating the sharing of information and resources among the relevant administrative agencies, developing joint investigative and enforcement strategies, and encouraging the reporting of alleged violations.
As a result of this vastly improved communication and collaboration among different fed-eral and state agencies, a single audit by one agency may now result in investigations and enforcement actions at multiple levels under multiple different laws, each with its own potential penalties and other consequences. This means that misclassification of even a single position carries the risk of expansive agency enforcement. As agencies have intensified the publicity of enforcement proceedings, such actions now more easily attract the attention of the plaintiff’s bar, resulting in a greater risk of private lawsuits.
b. Recent Amendments to the Law
Emergent State Misclassification Legislation
State legislatures have enacted a range of misclassification statutes addressing the classification of workers as employees or independent contractors. Some of the laws are specific to certain industries where worker misclassification is perceived to have been particularly rampant. For example, New Jersey passed the Construction Industry Independent Contractor Act. The statute creates a rebuttable presumption that full-time construction workers are employees and not independent contractors, for purposes of many New Jersey labour and employment statutes. Penalties for violations include suspension of the contractor’s registration, “stop-work” orders, and civil fines. Similar statutes have been enacted in Delaware, Maine, New York, Pennsylvania, as well as several additional states.
Other states have laws that apply more generally to all industries. California’s Independent Contractor Law, for example, prohibits any form of “wilful misclassification,” and makes it unlawful for employers to charge misclassified employees for business expenses and to make improper deductions from their pay. The statute not only imposes harsh penalties on violators, but also holds outside non-legal consultants jointly liable for “knowingly advis[ing] an employer to treat an individual as an independent contractor to avoid employee status” if it turns out the individual was not in fact an independent contractor. Other states that have enacted misclassification laws include Colorado, Connecticut, Illinois, Louisiana, Maryland, Massachusetts, New Hampshire, and New Mexico.
As discussed, earlier Arizona passed a law, Declaration of Independent Business Status (“DIBS”), allowing employers contracting with independent contractors to prove the existence of such a relationship through a signed declaration by the independent contractor. A declaration by the independent contractor is considered, under the law, a rebuttable presumption that an independent contractor relationship exists. The employer is not required to include such a declaration, and lack of such does not raise a presumption that an independent contractor relationship does not exist.
