NY State Joins Feds in Increasing Scrutiny of Worker Misclassification

Diana Uhimov, April 17, 2014.

Employee misclassification occurs when employers treat workers who should be considered employees as independent contractors or simply do not report them and pay them “off the books”.  The consequences for misclassification may include civil penalties, liability for employment taxes, class action lawsuits for unpaid wages, and even criminal prosecution.  Although engaging an independent contractor may appear to streamline the hiring process for companies upfront, it is critical to ensure that workers are properly classified to prevent audits, investigations and potential lawsuits.  The crackdown on businesses who incorrectly classify employees as independent contractors has intensified following recently forged partnerships between federal and state agencies, as well as across state agencies. To avoid liability, employers should be certain that their workers are bona fide independent contractors under the applicable laws, and that the relationship is properly implemented, documented, and structured.

Misclassification is treated as a serious problem by the United States Department of Labor because misclassified workers are denied access to benefits to which they would otherwise be entitled. These benefits include family and medical leave, overtime compensation, minimum wage pay, and unemployment insurance.  On the other hand, misclassification also hurts business owners who try diligently to abide by the laws, by giving a competitive edge to those evading compliance. The IRS and state governments also have a strong interest in identifying employers attempting to skirt the law since a worker’s status determines what taxes are paid and who is charged with paying these taxes.  Generally, the employer is responsible for withholding income taxes, withholding and paying Social Security and Medicare taxes, and paying unemployment tax on behalf of employees.  But with independent contractors, federal and state governments are deprived of upfront tax revenues generated through withholdings.

Generally, someone is an independent contractor if the business for which the services are performed controls or directs only the result of the work, but not the means and manner of carrying out the work.  New York courts usually consider the totality of the circumstances, focusing on the degree of employer control over the worker.  The degree of control inquiry focuses on whether the company may direct how the worker does his or her job; how the worker is paid; who provides the tools necessary for the job; whether expenses are reimbursed; where the job is performed; and the benefits provided.  However, the tests used to determine whether a worker is an independent contractor vary not only state to state, but also among industries and agencies.  New York has enacted misclassification statutes covering two industries where the occurrences are widespread–the construction industry and the commercial goods transportation industry.  The New York State Construction Industry Fair Play Act, as well as the newly signed New York State Commercial Goods Transportation Industry Fair Play Act, presumes workers are employees unless they meet all three of the following criteria:

1. Free from control and direction in performing the  job, both under contract and in fact;
2. Performing services outside of the usual course  of business for the hiring company; and
3. Customarily engaged in an independently established trade, occupation or business that is  similar to the service provided to the company in question.

In 2007, New York State established a Joint Enforcement Task Force on Employee Misclassification, which conducts audits and investigations each year.  Last year, its 13,000 audits revealed 127,000 workers were misclassified as independent contractors and over $55 million in unpaid unemployment contributions were due. The highest offending industries were found to be: professional, scientific and technical services; food/drink services; administrative and support services; ambulatory health care services; specialty trade contractors; construction; educational services; messengers; performing arts, spectator sports, and related industries; motion picture and sound recording; and amusement, gambling and recreational industries. The Task Force also ramped up its efforts to combat misclassification in 2013 by adding joint agency “sweeps” of construction sites, bars and restaurants, automotive repair centers, grocery stores, adult entertainment venues, and retail establishments to its enforcement activities.

Now, the New York Attorney General has partnered with the DOL in a data sharing deal, to further target worker misclassification. The deal between New York and the federal government aims to level the playing field by going after offending employers.  Employers should anticipate escalated aggressiveness in identifying and prosecuting misclassification. And with cooperative enforcement among state and federal agencies, it is likely that one enforcement action will trigger others. In addition, for companies operating in multiple jurisdictions who have been subjected to actions in other states, scrutiny in New York is more likely.

The best course of action for New York companies is to familiarize themselves with the classification requirements and review their independent contractor compliance prior to facing any potential audits or lawsuits. The industries identified in the Task Force Report run the greatest risk of scrutiny, but any industry could be targeted.  Many instances of employee misclassification in New York involved businesses that failed to structure, document, and implement the independent contractor relationship in accordance with the law.  Therefore, New York employers should be on heightened alert.