A new bill introduced in the House of Representatives would increase to staggering new heights the financial consequences of misclassifying workers as independent contractors. The Employee Misclassification Prevention Act of 2008, H.R. 6111, introduced May 22, 2008, would allow successful plaintiffs claiming to have been misclassified as independent contractors and denied overtime and/or minimum wages under the Fair Labor Standards Act (“FLSA”) to recover triple damages. The bill also would expose employers covered by the FLSA that are determined to have repeatedly or willfully misclassified workers as independent contractors to a civil penalty of up to $10,000 for each individual whom it misclassified.
This proposal is especially pernicious because the definition of “employee” for purposes of the FLSA is much broader than for federal tax purposes. Thus, an individual who qualifies as an independent contractor for purposes of federal taxes would not necessarily qualify as such for purposes of the FLSA. Consequently, the imposition of draconian penalties for misclassifying workers under the FLSA’s broadly defined “employee” could lead many companies to conclude that the risks are simply too high to continue dealing with independent contractors.
H.R. 6111 was introduced by Rep. Rob Andrews (D-NJ), Chairman of the Education and Labor Committee’s Subcommittee on Health, Employment, Labor and Pensions, Rep. Lynn Woolsey (D-CA), Chair of the Education and Labor Committee’s Subcommittee on Workforce Protections, Rep. Mike Michaud (D-ME) and Rep. George Miller (D-CA) Chairman of the Education and Labor Committee.
The bill also would impose new recordkeeping requirements on employers covered by the FLSA that contract with independent contractors. Specifically, it would require an employer to make, keep and preserve records:
- of all independent contractors (explicitly identifying them as such) with whom the employer, in the course of its trade or business, has engaged, and
- of the remuneration and hours relating to the services performed by such independent contractors.
An employer would need to provide a notice to all employees and independent contractors whom the employer engages that:
- informs the individual of his or her status (as an employee or independent contractor),
- refers the individual to a U.S. Department of Labor (“DOL”) website that contains information concerning legal rights of employment,
- contains contact information for the DOL, and
- for independent contractors only, describes specified rights that are available only to employees.
The bill would impose new requirements on DOL and on state agencies that administer the unemployment laws. The DOL would be required to establish a new “employee rights website” containing specified information. New conditions would be imposed on states as a condition for receiving federal unemployment payments, namely:
- that states enact laws providing for the auditing and investigation of employers that have not registered with the state unemployment department or are paying compensation that is not reported as wages for purposes of unemployment taxes (e.g., because such compensation is being paid to independent contractors), and
- that states establish administrative penalties for misclassifying workers as independent contractors for purposes of the state’s unemployment laws, or for paying unreported compensation to employees without proper recordkeeping.
Additional provisions contained in the bill would incorporate into the criteria that the DOL uses when evaluating state unemployment-tax audits a new requirement that the evaluators evaluate a state’s effectiveness in identifying under-reporting of wages (e.g., on account of workers being misclassified as independent contractors). The bill also would mandate the sharing of information concerning instances of worker misclassification within the DOL and with IRS, and require that DOL focus at least 25 percent of its audits on the new record-keeping requirements and that such audits target industries within a high incidence of worker misclassification.
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H.R. 6111 would create a palpable chilling effect on the use of independent contractors by all companies that are covered by the FLSA, namely, those (i) with workers engaged in interstate commerce, producing goods for interstate commerce, or handling, selling, or otherwise working on goods or materials that have been moved in or produced for such commerce by any person, and (ii) whose annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise taxes at the retail level that are separately stated), plus certain health-related facilities and public agencies.
The financial consequences of losing a lawsuit brought by independent contractors claiming to have been misclassified and denied overtime wages would be intolerable, with the specter of triple damages, plaintiffs’ attorney fees – and possibly a civil fine of up to $10,000 per misclassified worker. Moreover, the new information-sharing provisions would significantly increase the likelihood that an adverse decision under the FLSA would lead to similar inquiries by the Internal Revenue Service and state unemployment agencies.
While the bill is intended to be pro-worker, the new recordkeeping requirements might not be appreciated by self-employed service providers who offer their services on a project-fee basis and have developed efficiencies in their business that translate into inordinately high fees per hour worked, as the bill would require them to disclose to their clients the number of hours actually worked on a project.
If this bill were enacted, a company whose business model is predicated on large numbers of independent contractors would need to carefully evaluate the fiscal prudence of continuing those operations in a post-H.R. 6111 environment.
For self-employed service providers, the enactment of this bill would almost certainly diminish their prospects of selling services to companies that are covered by the FLSA, unless they could provide the client companies with compelling evidence of their independent-contractor status, including evidence that they could not be perceived as being economically dependent upon that client company. For an independent contractor just starting out and seeking his or her first client, the enactment of H.R. 6111 would effectively doom that quest, unless the individual’s services could be sold to consumers, since consumers are not covered by the FLSA.
