The North Carolina Senate recently unanimously passed Senate Bill 694, entitled “Employee Misclassification Reform.” The bill provides additional sanctions for employers that repeatedly misclassify employees as independent contractors. Repeat offenders can be assessed a fine of up to $1,000.00 per misclassified employee. In addition to providing sanctions, the bill will create a new division within the Office of State Budget and Management. This division will be charged with investigating reports of employee misclassification and coordinating sanction and enforcement efforts between the Department of Revenue, the Industrial Commission, the Department of Labor, and the North Carolina Division of Employment Security.
Other sanctions can include back taxes, wages, and benefits, in addition to other penalties that can be assessed by the agencies listed above. An additional concern for violators is the fact their professional licenses could be revoked or suspended by their governing boards. The bill does provide for a temporary amnesty program to encourage voluntary compliance with enforcement efforts. Employers that meet the criteria for the amnesty program will be immune from the $1,000.00 fine for past instances of employee misclassification.
North Carolina companies that classify individuals as independent contractors would be wise to consider whether their current arrangements put them at risk for investigation and sanction. Traditionally, the analysis of whether an individual is an employee or an independent contractor has turned on the level of control asserted over the individual. Senate Bill 694 codifies the control factors from Hayes v. Board of Trustees of Elon College, 224 N.C. 11 (1944), which include:
(1) Whether the individual is engaged in an independent business, calling, or occupation.
(2) Whether the individual is to have the independent use of his or her special skill, knowledge, or training in the execution of the work.
(3) Whether the individual is doing a specified piece of work at a fixed price or for a lump sum or upon a quantitative basis.
(4) Whether the individual is not subject to discharge because he or she adopts
one method of doing the work rather than another.
(5) Whether the individual is not in the regular employ of the other contracting party.
(6) Whether the individual is free to use such assistants as he or she may think proper.
(7) Whether the individual has full control over such assistants.
(8) Whether the individual selects his or her own time.
No individual factor is controlling in this determination, which can make the analysis difficult at best. Now that the bill has passed in the Senate, it is in the House for review. If you have a question about whether your business is properly classifying individuals, please contact a member of our Employment Law team.