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Connecticut Increases Civil and Criminal Penalties for Misclassifying Employees as Independent Contractors

Joining Nebraska, New Jersey, Maryland, Minnesota, and Illinois, on May 5, 2010, Connecticut Governor Jodi Rell signed into law Public Act 10-12, “An Act Implementing the Recommendations of the Joint Enforcement Commission on Employee Misclassification” (“the Employee Misclassification Act”). The principal impact of the Employee Misclassification Act is to increase criminal and civil penalties on employers for misclassifying employees as independent contractors. Under current law, the civil penalty for misclassifying employees is $300.00 for each violation. The Employee Misclassification Act increases that penalty to $300.00 per day for each violation. Thus, if an employer misclassifies a worker as an independent contractor and continues that misclassification for one year, the civil penalty for this error would rocket from $300.00 to $109,500.00 ($300.00 per day times 365 days), a 36,500 percent increase. In addition, the Employee Misclassification Act makes the misclassification of workers as independent contractors a felony if done with the intent to harm the State with respect to workers compensation insurance payments or the Second Injury Fund.

The legislation purports to implement some of the February 2010 recommendations of the Joint Enforcement Commission on Employee Misclassification, which recommended greater coordination and enforcement activities by state agencies, as well as an examination of enhanced penalties.

The Employee Misclassification Act takes effect October 1, 2010.

No Uniform Standard for Determining ‘Independent Contractor’ Status

One of the more difficult aspects of the employee misclassification issue concerns the absence of a uniform standard to determine which individuals constitute employees and which are true independent contractors. In Connecticut and elsewhere, there exists no single legal test for employee status.

Connecticut has adopted a three-part “ABC Test” to determine whether an individual is an employee or independent contractor for purposes of unemployment compensation. C.G.S.A. § 31-222(a)(1)(B)(ii). Under the ABC Test, an individual will be considered an employee unless he or she meets all three of the following standards:

(1) The individual is free from direction and control in connection with the performance of the service;

(2) The individual must provide the service either outside the usual course of business or outside of all of the employer’s places of business; and

(3) The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service performed.

 

C.G.S.A. § 31-222(a)(1)(B)(ii) specifically rejects reliance on prior “master-servant” case authority.

 

In contrast, the United States Internal Revenue Service continues to apply the common law “right to control” standard by focusing primarily on whether the putative employer has the “right to control” the individual. Although the IRS’s approach is right-to-control oriented, it examines 20 different criteria to assess the employment relationship. Thus, while an individual working at the company’s principal place of business during regular business hours might meet the IRS common law “right to control” test, that same individual would not meet the Connecticut ABC Test because he or she would be providing the service during the usual course of business and at the company’s location.

Further complicating the matter, for public policy and other reasons, Connecticut’s Workers Compensation Law defines “employee” in a completely different way. Thus, elected officials, volunteer and auxiliary police officers, and members of the National Guard on active duty are statutorily deemed to be “employees” for purposes of workers compensation coverage. C.G.S.A. § 31-275 (9)(A).

 

That the same individual can be found to be both an “independent contractor” for some purposes and an “employee” for others can create a trap for the unwary business.

Advice for Connecticut and Other Employers

 

In addition to the new Connecticut Employee Misclassification Act, both the United States Congress and the United States Department of Labor have promised to step up investigations of employee misclassification through new legislation and enforcement actions.

 

On April 22, 2010, a proposal to impose federal civil penalties for worker misclassification was introduced in Congress. Entitled “the Employee Misclassification Prevention Act,” the proposed legislation would require employers to notify workers of their “independent contractor” classification and provide information on what to do if the worker believed the classification was improper. On April 29, 2010, Deputy Labor Secretary Seth Harris announced a Labor Department initiative to put the onus on employers to demonstrate compliance with federal wage and hour laws, including issues dealing with the classification of workers. Secretary Harris explained that under the initiative, employers would have to prepare written plans to explain why individuals were classified as independent contractors rather than employees. See “U.S. Outlines Plan to Curb Violations of Labor Laws,” The New York Times (April 30, 2010), available at:http://www.nytimes.com/2010/04/30/business/30comply.html.

 

Given the enhanced penalties adopted by Connecticut and other states, the prospect of enhanced federal penalties and requirements, and the promise of greater scrutiny by the United States Department of Labor, employers would be well advised to proactively reexamine their use of independent contractor classifications. In certain circumstances, employers may wish to renegotiate agreements with independent contractors to ensure that their status will be sustained and prepare internal assessments to demonstrate the appropriateness of the classification. In other cases, where the company runs the risk that the classification may not be upheld, the employer may wish to restructure these relationships in advance of enforcement actions.

 

For more information about the Connecticut Employee Misclassification Act or independent contractors generally, please contact the author below or the member of the firm who normally handles your legal matters.

 

Matthew T. Miklave
Stamford
(203) 326-7437 or
(212) 351-4663
MMiklave@ebglaw.com