Experienced Employment Lawyer in Classification & Misclassification Matters throughout Maryland and the District of Columbia
Joyce E. Smithey is a seasoned employment attorney who represents employers, employees, and independent contractors throughout Maryland in matters involving misclassification of employees and contractors. Ms. Smithey also counsels employers in Maryland regarding classification policies and compliance with state and federal laws.
For the past several years, the issue of employee misclassification has continued to grow in Maryland and throughout the country. In response to the ever-increasing number of misclassification cases (and the loss of tens of billions of dollars in employment taxes), the U.S. Department of Labor and the IRS have ramped up efforts to work with individual states in order to curb the practice.
In addition to collecting lost tax revenue, the federal and state governments are coordinating enforcement efforts and sharing information to ensure that workers who should be classified as employees receive their due wages, benefits, and protections.
From an employer’s perspective, there are many financial incentives for classifying and labeling individuals as independent contractors as opposed to employees. Specifically, an employer can save on many expenses such as the following:
- Employers do not have to pay unemployment insurance tax contributions for independent contractors.
- Employers do not have to provide workers’ compensation coverage to independent contractors.
- Employers avoid payroll tax when classifying individuals as independent contractors.
Regardless of why an employee is misclassified as an independent contractor – whether intentional or unintentional – such misclassification is against the law.
Employee or Independent Contractor?
One of the primary reasons that so many misclassification issues exist is because there is no set, single standard used to determine what constitutes an independent contractor. For example, a federal agency, such as the IRS, may employ a different multi-factor test than that of a state government.
Maryland law presumes that all workers are employees unless and until they meet the independent contractor status test as governed by state law. To this end, a worker’s status is determined through an examination of the relationship between the worker and the person or entity that hired said worker.
Such a relationship is always fact-specific; and the existence of an independent contractor agreement between the parties is not, by itself, determinative of an independent contractor agreement.
Maryland’s Independent Contractor Test
Some aspects of the parties’ relationship that the Maryland Independent Contractor test focuses on include the parties’ respective rights, responsibilities, roles, degree of control and direction, and financial aspects. Essentially, if the parties’ relationship is effectively that of an employer-employee, then Maryland will classify the worker as such.
Specifically, the Maryland Secretary of the Department of Labor, Licensing and Regulation (“DLLR”) provides the following guidance regarding the qualifications the State evaluates when determining whether a worker is an independent contractor:
- The worker is traditionally engaged in an independent occupation or business of the same type as the work at hand entails.
- The worker is performing work that is outside the scope of the normal course of business of the person or company who hired the worker.
- The worker is – both in fact and pursuant to a contract – free from direction and control over performance of the work at issue.
In cases where the legal classification of an employee/independent contractor is at issue, it is the employer’s burden to sufficiently prove that the classification is proper and that the classification can be substantiated.
What Happens in Cases of Misclassification?
Maryland’s Workplace Fraud Act & Other State Laws
The misclassification of employees and independent contractors takes place in all industries with respect to all kinds of occupations. However, because of the prevalence of misclassification in the construction industry, Maryland enacted the Workplace Fraud Act, which focuses on the landscaping and construction industries. The Act is enforced by the DLLR; and the Worker Classification Unit is charged with issuing violations of the Act as well as assessing penalties to those employers in misclassification cases.
In addition to the Workplace Fraud Act, Maryland’s Unemployment Insurance Law and the State’s Workers’ Compensation Act presume that all workers are employees unless properly classified as independent workers. Pursuant to these laws, employers who misclassify workers (thereby unlawfully failing to contribute requisite taxes and insurance coverage) may receive significant penalties.
**Note: The DLLR may also report determinations of misclassification to the Division of Labor and Industry, Insurance Administration, Worker’s Compensation Commission, and Comptroller.
Recent Increase in Penalties
In the Fall of 2016, the Maryland legislature enacted new sanctions on those employers who misclassify workers. Essentially, if the DLLR finds that an employer has failed to correctly classify a worker as an employee, the following penalties and sanctions may apply:
- Civil penalties
- An assessment of delinquent payments of unemployment contributions for the period of time of misclassification – per worker
- If an employer fails to pay the delinquent payment assessment within 45 days, the employer is further assessed interest at a rate of 2% monthly, commencing with the first due date after the notice of misclassification (once again, per worker)
Moreover, Maryland has imposed enhanced penalties to those employers who “knowingly” violate the law. Specifically, if the DLLR determines that an employer knowingly misclassified a worker as an independent contractor, the employer is subject to the following penalties:
- $5,000 penalty per employee
- $10,000 penalty per employee for subsequent violations
- $20,000 penalty for individuals, such as attorneys, human resource officers, accountants, etc., who knowingly advised the employer to improperly classify workers
What Counts as “Knowingly” Misclassifying Workers?
For purposes of employee misclassification, Maryland has defined “knowingly” as “having actual knowledge, deliberate ignorance, or reckless disregard for the truth.”
Some surefire ways for an employer to find itself “knowingly” violating Maryland’s Workplace Fraud Act regarding misclassification of employees include the following:
- An employer that has previously violated the Workplace Fraud Act or other comparable state or federal law may be determined to have knowingly misclassified employees.
- An employer’s refusal or failure to cooperate with an investigation and/or to turn over requested records and documents will likely result in a finding that the employer knowingly misclassified employees in violation of the law.
- An employer who treated other workers performing analogous duties and tasks under similar circumstances as employees may result in a finding that the employer knowingly misclassified the employees at issue.
- If any other evidence exists that sufficiently demonstrates that the employer knew the worker at issue was classified incorrectly – but either recklessly or deliberately ignored the law – it will likely result in a finding that the employer knowingly misclassified employees in violation of the law.
What Counts as “Not Knowingly” Misclassifying Workers?
Maryland’s Workplace Fraud Act provides that the DLLR must take into consideration certain factors that constitute “strong evidence that an employer did not knowingly fail to properly classify” a worker, including the following:
- The employer classifies as independent contractors all workers in similar circumstances, performing similar tasks for the employer, AND the employer reports the workers’ incomes to the IRS.
- The employer sought guidance and received a determination from the IRS that the worker (or other workers in similar circumstances, performing similar tasks for the employer) is an independent contractor.
Potential Federal Consequences of Misclassification
Because Maryland’s effort to correct and prevent worker misclassification is just one part of a nationwide effort, led by the U.S. Department of Labor, employers should expect additional reporting of findings of misclassification to any number of federal agencies with interests in this initiative, including the Internal Revenue Service.
There is a lot at stake for employers when it comes to the classification of employees. Attorney Joyce E. Smithey can provide valuable legal guidance regarding how to properly classify workers as well as how to deal with misclassification issues.
With Attorney Smithey’s assistance, employers can carefully and methodically go through the necessary steps and considerations to ensure compliance with all relevant state and federal classification laws and regulations, including the following:
- Identify and determine all current independent contractors.
- Identify, review, and comprehend state and federal criteria for classification of independent contractors – as well as the applicable state and federal penalties and consequences of misclassification.
- Conduct due diligence to identify past independent contractors, and determine if the classifications were appropriate.
- Carefully review the potential issues that may arise from plans to reclassify workers as employees who are currently misclassified as independent contractors.
- Craft appropriate strategies and safeguards to ensure the correct classification of workers in the future.
Schedule a Consultation with Misclassification Attorney Joyce E. Smithey
If you are a Maryland employer and need to speak with an employer lawyer about employee classification or misclassification matters, contact Joyce E. Smithey to arrange a confidential consultation.
If you are a worker and believe you have been improperly classified as an independent contractor, Attorney Smithey can help you review your situation and provide guidance regarding your rights and potential options.
Ms. Smithey is a partner in the Maryland law firm of Rifkin Weiner Livingston LLC, and she represents employers and employees throughout Maryland and the D.C. area. To schedule a confidential consultation, call (410) 269-5066 or send Ms. Smithey a message online today.