Worker Misclassification Bill Would Impose Harsh Penalties, Restrict Access to Counsel

One of the latest manifestations of the growing hostility toward independent-contractor status throughout the states is a bill introduced March 8, 2008, in the Maryland General Assembly at the behest of the state’s Department of Labor, Licensing and Regulation (“DLLR”). The bill, H.B. 1590, would impose significant burdens on companies that contract with self-employed service providers while limiting their access to advisors who could help them structure such relationships properly. The bill is estimated to increase revenues by $2.4 million in FY 2009 based on penalties assessed against businesses operating in the construction sector alone.

The bill would add a new “Subtitle 9. Misclassification of Employees” to the section of Maryland’s Labor and Employment article. Its principal effect would be to increase the financial sanctions associated with a company violating the state’s unemployment laws, workers’-compensation laws, overtime and minimum-wage laws, timely wage-payment law or laws regulating the employment of minors – when the company also is found to have misclassified the affected workers as independent contractors under an “ABC” test. The key provisions of the bill are outlined below.

The New Subtitle 9 – Misclassification of Employees

The proposed new Subtitle 9 would create a presumption of employment unless it can be demonstrated that (A) the worker is free from control and direction, (B) the worker has an independently established business, and (C) the work is either outside the scope of the employer or performed away from the employer’s place of business. This three-factor test is commonly known as an “ABC” test.

Subtitle 9 also would give DLLR broad investigatory powers that rival those of criminal law-enforcement agencies, and require all businesses within the state to keep extensive records on all independent contractors with whom they do business and all employees for at least three years. DLLR would have the power to enter a company’s place of business unannounced to observe workers and interview the company’s employees and any independent contractors who do business with the company. The state also would be authorized to demand that a company produce records relating to its classification of individuals as independent contractors within five business days or face fines of up to $500 per day. The state would be empowered to obtain an administrative search warrant if denied access to a place of business.

The bill would permit an employee organization to institute lawsuits (on behalf of individual claimants or as a class action) against a company for misclassifying individuals as independent contractors and would authorizes courts to award successful plaintiffs triple damages plus attorney’s fees. The bill would establish a new administrative process for individuals to seek determinations concerning their status, as employees or independent contractors, and create new statutory whistleblower-type protections for individuals who complain about being misclassified as independent contractors. While individuals would be prohibited from making groundless or malicious complaints concerning their status, the bill provides no remedies for an aggrieved business.

Companies that are found to have misclassified individuals as independent contractors more than once could be debarred from all public contracts for two years. In addition, state agencies currently contracting with a company that determine the company may have been misclassifying individuals as independent contractors are required to withhold from fees payable to that company amounts sufficient to satisfy the company’s potential liabilities associated with the misclassification.

Additional remedies the new provision would create include:

  • A new private right of action for individuals who believe they are misclassified;
  • Penalties of up to $3,000 per misclassified individual, or double that amount for misclassifications found to be willful or repetitive;
  • Treble damages for recoveries under specified Maryland statutes when the plaintiffs have been misclassified as employees; and
  • A civil penalty of up to $20,000 imposed on any person who conspires with, aides and abets, assists, advises or facilitates a company in classifying workers as independent contractors, if the state determines that the workers do not satisfy its “ABC” test.

Overtime and Minimum Wage

Maryland uses an economic realities test to determine an individual’s status, as an employee or independent contractor, for purposes of its overtime and minimum wage laws. A company that is determined to violate these requirements and also the new Subtitle 9 would be liable for double damages – or even triple damages if the violation is found to be willful.

Unemployment Insurance

For purposes of its Unemployment Insurance Law, Maryland uses an “ABC” test, which is the same test contained in the new proposed Subtitle 9. The bill would create a new cause of action and increase the financial sanctions for companies that misclassify employees as independent contractors.

The new sanctions would include:

  • Increasing the interest rate charged on unpaid unemployment insurance contributions as a consequence of misclassification to 2 percent per month, and
  • Subjecting a company to fines of up to $3,000 per misclassified employee, if the state determines the misclassification was affirmative or with deliberate ignorance or reckless disregard.

Workers’ Compensation

For purposes of its workers’ compensation statute, Maryland uses the common-law test, which is essentially the “A” factor of the “ABC” test. The bill would create a new presumption of covered employment for individuals with respect to Maryland’s workers’ compensation law.

The bill also would authorize fines of up to $10,000 per employee for companies that misclassify individuals as independent contractors, if the state determines that there was a misrepresentation, plus additional $10,000 penalties for misclassifications with deliberate ignorance or reckless disregard. The state would be authorized to 1) assess interest on unpaid penalties-fines, 2) bring an action in circuit court to recover not only such penalties but also the costs of investigation and attorney’s fees, and 3) suspend an employer’s license to do business in the state if it fails to comply.

The Maryland bill is one of the extreme examples of actions states are considering in their quest to attack the perceived problem of worker misclassification. As the bill reveals, this type of approach can create a significant “chilling” effect among even businesses that correctly classify workers as independent contractors.