The Payroll Fraud Prevention Act of 2015, introduced on July 29, 2015, by Senator Bob Casey (D-Pa), would impose new administrative burdens on firms that do business with certain independent-contractor service providers and expose such firms to draconian civil penalties if any of those service providers are determined not to qualify as independent contractors for purposes of the Fair Labor Standards Act (“FLSA”).
Initial cosponsors of the bill, S. 1896, are Senators Al Franken (DFL-Minn), Patty Murray (D-Wash), Elizabeth Warren (D-Mass), Sherrod Brown (D-Ohio), and Jeff Merkley (D-Ore). This bill is substantially the same as prior versions of the Payroll Fraud Prevention Act that were introduced in 2013 by Senator Casey, S. 1687, and in 2011 by Senator Brown, S. 770.
A companion bill, H.R. 3427, was introduced in the House of Representatives on the same day by Representative Frederica Wilson (D-Fla). Initial cosponsors of this bill are Representatives Bobby Scott (D-Va), John Conyers (D-Mich) and Donald Payne (D-NJ). A prior version of this bill was introduced in 2014 as H.R. 4611 by Representative Joe Courtney (D-CT).
While the prospects for the Payroll Fraud Prevention Act of 2015 in the current Congress are not positive, the re-introduction of this bill – for the third time – signifies the unrelenting commitment of its sponsors to increase the financial risks to firms that choose to do business with independent contractors and thereby impede the ability of self-employed individuals to operate their businesses. The new financial risks to which this bill would expose potential clients of self-employed individuals would create a powerful financial incentive for such potential clients to eschew independent contractors and instead do business with larger entities.
S. 1896 would create two new categories of individuals under the FLSA, called “non-employees” and “covered individuals.”
A “non-employee” would be defined as an individual who is not an employee of a person but is engaged by the person to perform services within the course of the person’s trade or business.
A “covered individual” would be defined as an individual who is either:
(i) an employee of a person, or
(ii) a nonemployee of a person (including an individual who is an employer), provided that the person engages the individual to perform services within the course of the trade or business of the person and
a. the person is required to issue an Internal Revenue Service Form 1099 to the individual, or
b. the person would be so required were it not for the fact that the individual operates through a legal entity, such as a corporation or LLC, provided that
i. the individual has an ownership interest in the entity of any amount, and
ii. the person requires the individual to operate out of such an entity as a condition of doing business.
The bill would require a firm that hires an employee or engages a “non-employee” engaged in commerce or in the production of goods for commerce to:
- Properly classify each “covered individual” as an employee or a non-employee; and
- Provide each “covered individual” with a specified written notice informing the individual that the individual is being classified as an employee or a “non-employee” and containing other specified information concerning the U.S. Department of Labor and the consequences to an individual of being classified as an independent contractor.
The notice would need to be provided within six months after the date of enactment to existing “covered individuals” and upon the commencement of services by new “covered individuals” or upon a change in status.
If a person fails to timely comply with the new notice requirement, the individual would be presumed to be an employee of the person for purposes of the FLSA, which presumption could be rebutted only by satisfying the demanding “clear and convincing evidence” standard.
The bill would expand the FLSA’s anti-retaliation protections by including within its list of prohibited acts a person discharging, or taking any other discriminatory action against, a “covered individual” who engages in any conduct opposing or contesting the person’s classification of a “covered individual” as an employee or a “non-employee” for purposes of the FLSA or federal employment taxes.
The misclassification of a “covered individual” as a non-employee for purposes of the FLSA would become a stand-alone FLSA violation under S. 1896. The liquidated damages otherwise recoverable for FLSA violations would be doubled with respect to “covered individuals” when the violation was caused by the misclassification of the “covered individual.” This doubling of the liquidated damages would create a potential liability of triple the amount of unpaid wages found to be owed.
The bill also would expand the civil penalties that DOL can impose for FLSA violations by imposing a per-individual civil penalty of up to $1,100 ($5,000 in a case of repeated or willful violations) for any violation of the FLSA’s (i) minimum wage requirement; (ii) overtime requirement; (iii) recordkeeping requirement; (iv) duty to correctly classify “covered individuals” as employees or independent contractors; or (v) new notice requirement for “covered individuals.” These proposed penalties would apply not only in a case where a “covered individual” is misclassified, but also in a case where a specified FLSA violation occurs with respect to any individual, including an individual whom the person treats as an employee for purposes of the FLSA.
The DOL would be required to create a new “employee rights” website summarizing the rights of employees and non-employees under the FLSA.
The bill would impose new requirements for states to intensify their auditing of companies in search of misclassified workers for purposes of state unemployment taxes. It also would require the DOL to institute internal practices to share information of worker misclassification with its Wage and Hour division and to target for auditing those industries with a frequent incidence of worker misclassification, as determined by the Secretary of DOL. Types of businesses that DOL has recently targeted include janitorial, construction, home care, transportation/trucking, cable installation, landscaping, and car/limousine services.
Comments:
The Payroll Fraud Prevention Act of 2015 would impose draconian financial sanctions on firms that misclassify certain individuals as independent contractors, and thereby significantly increase the financial risks of doing business with self-employed individuals.
S. 1896 would bring heightened significance to whether the type of services a person engages an independent contractor to perform are “within the course of the person’s trade or business,” as such individuals can qualify as a “covered individual.” The significance of “covered individual” status is that such individuals would be covered by the proposed new notice requirements, anti-retaliation protections, “triple damages,” and civil penalties for misclassification.
While current law imposes a civil penalty of up to $1,100 only with respect to a specified FLSA violation that is found to be repeated or willful, the bill would require such a finding only with respect to the higher-tier civil penalty of up to $5,000. A specified FLSA violation is all that would be required under the bill to subject an employer to the lower-tier civil penalty of up to $1,100 per individual.
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