Maryland Workplace Fraud Act of 2009

Date: 10/2/09
Title: Maryland Workplace Fraud Act of 2009

Effective October 1, 2009 the Maryland Workplace Fraud Act of 2009 makes it illegal to wrongly classify employees as independent contractors.  Employers who knowingly misclassify their workers in order to cut payroll costs or leave workers without protection from workplace protection laws are in violation of workplace fraud.   

To investigate workplace fraud, Governor O’Malley signed an Executive Order establishing a Joint Enforcement Task Force on Workplace Fraud.  The purpose of the task force is to assist in recouping tax revenue, such as unemployment insurance taxes, wage withholdings, etc. lost because of the misclassification of employees as independent contractors.  Even though the Maryland Workplace Fraud Act targets the construction and landscaping industries, the Task Force will have jurisdiction over all employers in all industries.  For instance, an employer can be forced to pay unemployment insurance (UI) contributions if the Department of Labor, Licensing and Regulation finds that the workers were illegally classified.  The Maryland Unemployment Insurance division investigates employee classification through random and targeted audit as well as when a person claims UI benefits but are not listed as an employee by the employer. 

If an investigation is initiated into the actions of a landscaping or construction business, the law authorizes fines of $500 per day if employers fail to provide documentation on independent contractors.  Employers must keep records on each worker’s classification, their pay rate, hours worked, and the amount they were paid each pay period.  For employees who are classified as independent contractors or exempt employees, businesses must provide them with written notice in English and Spanish of their classification and what the implications are for being a contractor versus being an employee. 

Essentially, if a construction or landscaping business knowingly fails to make unemployment insurance tax contributions or provide workers’ compensation coverage for employees who are misclassified as independent contractors; civil penalties of up to $5,000 per misclassified employee for the first offense can be imposed against the business.  Second offense penalties are doubled and the third offense is a $20,000 fine.  The Act permits employers who misclassify an employee to get into compliance within 45 days without penalty.  Employees who have been misclassified as independent contractors in Maryland can also pursue claims for overtime, unpaid wages, and unemployment and can appeal their tax treatment to the IRS.  Additionally, a key provision of the bill is a private right of action where employees who are knowingly misclassified can enforce their own rights in court.  The law allows employees up to three years after a violation occurs to file a case in court, unless a government agency has taken action and has issued a final order against the company.  A successful suit could include triple damages and other financial relief including attorney’s fees. 

Maryland considers the following ABC test in determining whether a worker is an employee or independent contractor.  Under this test, the employer-employee relationship is presumed unless and an employee is exempt or employer demonstrates that:

a.        The individual is free from control and direction;

b.        The individual customarily is engaged in an independent business of the same nature; and

c.        The work is outside of the usual course of business of the employer or performed outside of any place of business of the employer.  

If you are not a Maryland employer, we suggest that you check the law in your State.  Other states that have introduced, and may have passed, similar bills include: California, Colorado, Indiana, Iowa, Kansas, Kentucky, Massachusetts, Michigan, New York, New Jersey, New Mexico, Oregon, Pennsylvania, Rhode Island, Texas,  Vermont, and Washington.   

At the federal level, President Obama has sponsored proposed legislation to punish employers for employee misclassification.  The IRS has also been aggressively targeting employment tax fraud cases and has announced that it will implement a detailed federal employment tax audits program this fall.  The program is expected to last for three years and focus on the following four key areas: (1) worker classifications, (2) fringe benefits, (3) officer’s compensation; and (4) expense reimbursement. 

We, at Workplace Dynamics LLC, can help you assess your independent classifications to ensure that you have properly classified your workers.

The foregoing has been prepared for the general information of clients and friends of Workplace Dynamics LLC.  It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel.