Article by M. Christine Carty

The Senate Health, Education, Labor and Pension Committee is currently considering legislation introduced on April 8, 2011 intended to end misclassification of employees as independent contractors. Senate Bill 770 (S.770), known as the “Payroll Fraud Prevention Act” (“PFPA”), would amend and expand the Fair Labor Standards Act (“FLSA”) to include “non-employees” within the ambit of the FLSA minimum wage, hours and overtime protections. On its face, the PFPA is straightforward legislation, but the implications of some of its provisions are far-reaching and its activist approach conflicts with existing protections for companies that include independent contractors within their workforces.

The direct effect of S. 770, if enacted, will be to (i) require all employers to provide written notice to all employees and “non-employees” (i.e. independent contractors) of their status¹ and refer the recipients to the U.S. Department of Labor (“DOL”) website for information about their rights, (ii) impose penalties of up to $5,000 for each misclassification, (iii) increase audits of companies in targeted industries, and (iv) increase referrals of perceived violations to the Wage and Hour Division from other divisions within the DOL. The proposed language of the mandatory notice is very specific: “Your rights to wage, hour and other labor protections depend upon your proper classification as an employee or non-employee. If you have any questions or concerns about how you have been classified or suspect that you have been misclassified, contact the Department of Labor.” The PFPA also would require the DOL to set up a web page within six months that explains workers’ rights regarding classification. Finally, S. 770 establishes a private right of action for workers to enforce the provisions of the PFPA.

While these provisions are straightforward, other provisions of this legislation have less obvious and potentially more far-reaching effects. S. 770 directs that if an employer does not provide the required notice to a “covered individual” (i.e. independent contractor), there is a presumption that the individual is an employee, which can be rebutted only by “clear and convincing” evidence that the person is not an employee. This clear and convincing standard is much higher than the preponderance of the evidence standard (generally understood to be “more likely than not”) required to prove most civil suits. Further, if reclassified, a worker will be entitled to other FLSA protections, including a review of his or her wages for up to three years for compliance with minimum wage, hours and overtime requirements. If it is found that a company failed to comply with any of the minimum wage, hours or overtime requirements in compensating a reclassified worker during the three year period reviewed, the S. 770 prescribes that the employer must pay a “special penalty” in the amount of four times the actual unpaid minimum wages or overtime compensation. Of course, it is unusual for a company to pay overtime to an independent contractor, making the risk of exposure to a substantial penalty greater for entities that rely heavily on independent contractor relationships. Thus, potentially, a mistaken failure to provide an independent contractor with the statutory notice of rights could result in the worker’s reclassification as an employee by presumption followed by a significant financial penalty for each reclassified worker. The “special penalties” could easily become significant if the employer failed to give notice to a group of workers.

Read the rest of this mondaq.com article by M. Christine Carty of Shnader Attorneys at Law here >>