Misclassification of Employees As Independant Contractors/Owner-Operators May Soon Violate Federal Law

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Misclassification of Employees As Independant Contractors/Owner-Operators May Soon Violate Federal Law
November 1, 2008
Logistics UPDATE
Ronald Leibman

On September 29, 2008, Senator Ted Kennedy, with the co-sponsorship of Senators Barack Obama and John Kerry, introduced the Employee Misclassification Prevention Act (S.3648) into the Senate. A companion bill was previously introduced into the House by Representatives Andrews and Woolsey on May 21, 2008 (H.R. 6111) (the Senate and House bills are, together, referred to as the “Bill”).

This Bill is aimed at preventing employers from improperly classifying employees as independent contractors, thereby avoiding responsibility for their benefits, by making such misclassification a prohibited act under the Fair Labor Standards Act ("FLSA"). Key provisions of the Bill would:

  • Require that employers notify workers of their classification as an employee or independent contractor and of their right to challenge such a status.
  • Require State agencies responsible for unemployment benefits to audit employers to identify worker misclassification.
  • Require that the United States Department of Labor ("DOL") audit employers in industries which frequently misclassify employees.
  • Allow the Internal Revenue Service and the DOL to share information on employers who misclassify employees.

The Bill also includes provisions requiring (i) employers to keep certain records on independent contractors, and (ii) that the DOL establish a website summarizing the rights of employees under the FLSA, among other statutes, and provides for liquidated damages and civil penalties of up to $10,000 for violation of the FLSA.

Employers should be aware that the proposed legislation appears to follow the trend that has been going on in many states for some time, to limit independent contractor status. At a minimum, businesses in potential target areas, such as logistics and construction, would be advised to scrutinize their current contractor relationships (both contractual and operational) to verify that all current statutes and regulations defining independent contractor status are met, so as to prepare for the passage of the Bill in the next Administration.