Nebraska’s Employee Classification Act (“the Act”), L.B. 563, dramatically increases the administrative burden and financial risks of doing business with independent contractors in the construction or delivery services industries. The Act was signed into law by Governor Dave Heineman (R-Ne) and became effective on July 15, 2010.
I. Scope and Applicability
The Act applies specifically to contractors involved in construction and delivery services. For these purposes, the Act contains the following defined terms.
- A “contractor” is “an individual, partnership, limited liability company, corporation, or other business entity engaged in a delivery service or construction contractor business…, and includes any subcontractor performing services for a contractor.”
- A “delivery service” is “the transport and delivery of goods, products, supplies, or raw material upon the highways of [Nebraska].”
- “Construction” is defined as “work on real property and annexations, including new work, additions, alterations, reconstruction, installations, and repairs performed at one or more different sites which may be dispersed geographically.”
II. Criteria for Determining Worker Status
The Act creates a presumption that an individual performing construction labor services for a contractor is an employee for purposes of the Act, unless the following criteria are met:
- (a) The individual has been and will continue to be free from control or direction over the performance of such services, both under his or her contract of service and in fact; (b) such service is either outside the usual course of the business for which such service is performed or such service is performed outside of all the places of business of the enterprise for which such service is performed; and (c) such individual is customarily engaged in an independently established trade, occupation, profession or business;
- The individual has been registered as a contractor pursuant to the Contractor Registration Act prior to commencing such construction work for the contractor; AND
- The individual has been assigned a combined tax rate pursuant to subdivision (4) of section 48-649 or is exempted from unemployment insurance coverage pursuant to subdivision (6) of section 48-604 [specific statutory exclusions from unemployment taxes].
B. Delivery Services
The Act creates a presumption that an individual performing delivery services for a contractor is an employee unless:
- (a) The individual has been and will continue to be free from control or direction over the performance of such services, both under his or her contract of service and in fact; (b) such service is either outside the usual course of the business for which such service is performed or such service is performed outside of all the places of business of the enterprise for which such service is performed; and (c) such individual is customarily engaged in an independently established trade, occupation, profession or business; OR
- The individual is exempted from unemployment insurance coverage pursuant to subdivision (6) of section 48-604 [specific statutory exclusions from unemployment taxes].
III. Violations and Fines
It shall be a violation of the Act for a contractor to designate an individual as an independent contractor who would be properly classified as an employee under the Act (i.e., covered construction and delivery workers).
A violation of the Act will subject a contractor to a $500 fine per misclassified individual for the first offense; the fine increases to $5,000 for each second and subsequent offense. Upon a finding of a violation of the Act, the Commissioner of Labor (“Commissioner”) must instigate proceedings to collect unpaid combined taxes plus interest, and notify the Department of Revenue and Nebraska Workers’ Compensation Court of the violations. After receiving notification, the Department of Revenue must promptly investigate and proceed with collection of income tax not withheld plus interest and penalties. Violations reasonably believed to be a civil or criminal violation of Nebraska law must be reported to the appropriate prosecuting authority.
The Act requires all contractors to post a notice in a conspicuous place on the job site or place of business in English and Spanish. The notice must include the following language:
- “Every individual working for a contractor has the right to be properly classified by the contractor as an employee rather than an independent contractor if the individual does not meet the requirements of an independent contractor under the law known as the Employee Classification Act.”
- “If you believe you or someone else has not been properly classified as an employee or an independent contractor under the Employee Classification Act, contact the Department of Labor.”
V. Website and Hotline
The Act requires the Nebraska Department of Labor to establish and operate a hotline and website to allow individuals to report suspected violations of the Act. The Department of Labor must require reporting individuals to provide contact information and a description of the suspected violation, including the name of the business and job site location. The Act also establishes confidentiality requirements regarding information obtained through the website and hotline. The Act requires the Department of Labor to investigate all credible reports received through the new website and hotline.
The Act also requires the Department of Labor to provide annual reports to the legislature regarding compliance and enforcement. The report must include the number of reports received from the hotline and website, the number of investigated reports, the findings of those reports, the amount of combined tax, interest, and fines collected, and the number of and outcomes of referrals to the Department of Revenue, Nebraska Workers’ Compensation Court, and other appropriate prosecuting authorities.
VI. Contracts with the State or a Political Subdivision
The Act requires that for any contract between a contractor and the state or a political subdivision involving construction or delivery service, the contractor must submit an affidavit to the state or applicable political subdivision attesting that:
- Each individual performing services for the contractor is properly classified under the Act;
- The contractor has completed a federal I-9 immigration form and has the form on file for each employee performing services;
- The contractor has complied with section 4-114 (requiring registration with and use of federal immigration verification system);
- The contractor has no reasonable basis to believe that any individual performing services for the contractor is an undocumented worker; and
- As of the time of the contract, the contractor is not barred from contracting with the state or any political subdivision pursuant to section 48-2912 (bars contractors who knowingly provide a false statement to the state or political subdivision from contracting with the state or any political subdivision for a period of three years after date of discovery of the falsehood).
The Act also requires the contractor to follow all provisions of the Act. Violations are grounds for rescission of the contract by the state or political subdivision.
VII. Unaffected Areas
The Act indicates that it does not affect: (1) common-law or statutory actions in tort; (2) the common-law interpretation of independent contractor status as it relates to tort liability or workers’ compensation claims; (3) the use of independent contractor as interpreted by the Department of Revenue or in actions pursuant to the Nebraska Revenue Act of 1967. Also, it is unclear as to the effect of these new definitions with respect to a contractor’s liability for unemployment taxes.
The foregoing is intended solely as general information and may not be considered tax advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.