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New Pending Employee Misclassification Legislation – What S694 and H482 Say And What It Could Mean for You

By: Regan Gatlin

A growing reality among employers across the state, and across the nation, is employee misclassification.  This could spawn from a variety of different factors, such as the confusion in the law as to what exactly is the difference between an employee and an independent contractor, the multitude of regulations that apply to either classification, a desire to avoid certain economic liabilities, and even an honest mistake.  The likely purpose for employee misclassification is probably a mixture of the abovementioned factors, and more.

In an attempt to remedy this confusion, provide for better regulations of employees and independent contractors, and further regulate employers, two bills have been introduced in the North Carolina General Assembly focusing on employee misclassification.  The House Bill, H482, was proposed in April of 2015 and has only encountered its First Reading. (House Committee on Commerce and Job Development will meet on Wednesday, June 17, 2015 at 11:00 AM to discuss this bill, among others.) H482 creates the Employee Misclassification Task Force whose Director is appointed by the Governor for the purpose of identifying, investigating, and educating employers and employees on employee misclassification.  

The Senate Bill, S694, was proposed in late March of 2015 and has made its way through committees, two amendments, and through its First, Second, and Third Readings.  S694 passed the North Carolina Senate and is now to be considered by the House of Representatives of North Carolina in the House Committee on Rules, Calendar, and Operations.  S694 creates the Employee Classification Division housed under the Office of State Budget and Management, whose Director is appointed by the State Budget Director.  The Division would have essentially the same duties and powers as the task force created by H482; investigating, identifying, and educating employers and employees on employee misclassification; but would not act on its own.  Instead, the Division would be housed under a pre-existing office of state government.

The Senate Bill, unique from the House Bill, contains a section that discusses particular sanctions for General Contractors, under Chapter 87 of the General Statutes, electrical contractors, vendors, and owners. With regard to general contractors, a General Contractor who misclassifies employees may be refused a license or lose their license, may be audited, and may be assessed additional penalties for newly discovered instances of misclassification.  For electrical contractors, the Board of Examiners of Electrical Contractors may audit pay and project records of licensee firms to prevent employee misclassification.  For vendors, the bill establishes that if a vendor has been assessed a civil penalty for misclassifying employees within the last five years prior to the date of a bid solicitation, the vendor will be regarded as ineligible for contracting.  Regarding works in progress, the bill requires the owner to certify to the county and city that they have read and understood the employee misclassification notice created under this statute.

Both bills establish a definition for employee misclassification as avoiding tax liabilities and other obligations imposed under the general statutes by misclassifying an employee as an independent contractor.  Not only do both pieces of legislation establish the definition for employee misclassification, they go further into identifying the definition of an independent contractor – or coming closer to providing such a definition.  They establish civil penalties for employers who misclassify their workers as $1,000 per misclassified worker for each instance of misclassification after the first finding within the previous three years, along with any other back wages, back taxes, or benefits that are ordered to be paid by the employer to the misclassified worker.  And, they also further state that while there is an opportunity for employers to have temporary amnesty, those employers must self-report instances of their own past employee misclassification to be exempt from civil penalties.

Both bills include the factors established in a 1944 North Carolina Supreme Court case, Hayes v. Board of Trustees of Elon College, for an independent contractor. Those factors include: (1) whether the worker is engaged in their own independent business; (2) whether the worker has independent use of his or her own skill, knowledge, or training; (3) whether the worker is doing specified pieces of work at fixed prices or is doing work for a lump sum or on a quantitative basis; (4) whether the worker is subject to discharge by adopting their own style of doing work; (5) whether the worker is in the regular employ of the employer/contracting party; (6) whether the worker is free to use assistants as they see fit; (7) whether the worker has full control over those assistants; and (8) whether he selects his or her own time or has a set schedule by the employer/contracting party.

While the bills essentially do the same thing, they both, it seems, cannot exist at the same time.  The issue legislators will be faced with is the decision between the two bills and which entity will be best for the State of North Carolina.  While both pieces of legislation establish new requirements for employers, employees, state agencies, and state investigators, S694 establishes further specific regulations for general contractors, electrical contractors, vendors, and owners. 

What could this mean for you?  Any employer, if these bills are passed, will have more regulations imposed on them regarding how they classify their workers.  Employers will need to clearly establish the duties of their workers.  All employers will need to become well versed and remain updated on the policies; such as tax laws, disability laws, and laws regarding benefits to employees; to determine whether they now, or will in the future, be subject to those regulations and be required to provide more, or less, to their workers.

If you’re a general contractor, with the Senate Bill, your license could be at stake if found to have misclassified workers.  This bears the question of whether it would be beneficial to self-report past misclassifications or risk having your license revoked. This question is prevalent because, while there is the opportunity for temporary amnesty by self-reporting, it is unclear whether temporary amnesty would apply to civil penalties only, such as the $1,000 penalty maximum or the paying back taxes, or if the temporary amnesty also covers preventing a license revocation under N.C.G.S. § 87-23.  If temporary amnesty does not include license revocation and you do not self-report and the licensing board audits your records and finds that you have misclassified workers, you may still have your license revoked.  The same question applies to electrical contractors as to whether the temporary amnesty would prevent their licenses from being revoked.

If you’re a vendor, with the Senate Bill, your eligibility to contract and bid is at stake.  It is unclear from the temporary amnesty portion of the statute whether the temporary amnesty would apply to just civil penalties, or whether it would also prevent a vendor from being placed on ineligible vendor status by self-reporting past employee misclassification.

These are all questions that need to be addressed before either bill is signed into law and a division or task force is created.


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