If you've been reading our #FBLawBlog for awhile (or in general do not live under a rock), you've most likely heard the term "misclassification." For our newbie readers (and those living under a metaphorical rock), "misclassification" refers to independent contractors that are technically employees by federal and state definitions. This became a big deal in the 2010's when the IRS woke up and realized a lot of Employers were (mis)classifying workers as independent contractors as a way to avoid employment taxes, such as FICA and other income tax withholdings required under our Federal tax code. The IRS responded by (1) prescribing a very convoluted factor test intended to be applied to every independent contractor and (2) conducting a bunch of random audits. North Carolina mingled with the idea of its own misclassification statute for years and finally landed on a law that stuck. Enter the Employee Fair Classification Act, which went into effect on December 31, 2017. Here's your Need-to-Knows:
1. In general, take misclassification seriously.
NC means business when it comes to cracking down on misclassification. The EFCA is more of a public policy statement than an enforcement law but it does put certain mechanisms in place to make it easier to identify misclassification and easier to do something about it. The EFCA creates an Employee Classification section within the NC Industrial Commission (worker's comp) with the ability to share misclassification data among other state agencies (think: NC Employment Security (unemployment) and NC Department of Labor (everything else)).
Here is an example of how misclassification can ruin your life:
An Independent Contractor is hired by ABCD Construction to install residential roofs. Independent Contractor is paid $100 per roof installed and works about 60 hours per week. One day, Independent Contractor falls off one of the roofs and files a worker's comp claim. The claim is denied because Independent Contractor is not an employee. Independent Contractor appeals and states he is misclassified and really is an employee. The Industrial Commission agrees and allows the worker's comp claim. Based on the EFCA, the Industrial Commission then shares this misclassification incident with other state agencies. Soon ABCD Construction is contacted by the Division of Employment Security who states ABCD Construction owes lots of money for unemployment that should have been paid for the misclassified worker. ABCD Construction also gets audited by the NC DOL, which is never a fun time. Independent Contractor (now: Misclassified Worker), feeling good after his recent worker's comp win, files a Wage and Hour complaint with the NC DOL and a federal claim under the Fair Labor Standards Act for overtime and minimum wage violations. The jury concludes Misclassified Worker should have been a full-fledged employee so ABCD Construction now owes back wages for minimum wage and overtime for all those 60 hour weeks. Misclassified Worker also wins liquidated damages against ABCD Construction under the NC Wage and Hour Act, doubling his judgment. Oh, and because of the misclassification, ABCD Construction also owes Misclassified Worker for things like health care since, had he been classified correctly as an employee, he would have opted into the ABCD Construction group health plan.
See where I'm going with this... Bad, bad, very bad.
2. You have a new poster to hang!
The EFCA also requires NC employers to add another employment poster to their break room that properly explains misclassification and how to report it. An easy version of this poster can be found here.
3. You can still have independent contractors, just consult with an attorney first.
The differences between an employee and independent contractor can be nominal at best. However, to avoid the chaos described in my above example, I highly recommend having someone independent compare the IRS factors to the actual situation. This independent person can be your trusted attorney, an HR consultant, a business consultant, or simply an educated friend. The point is to have a neutral person review the actual job and position and compare with the IRS factors to see if that particular job sways on the side of contractor or employee. An attorney can analyze this best but someone is better than nothing.
All that said, go forth and classify correctly!