Maryland’s general assembly passed the Workplace Fraud Act this year, with an effective date of October 1, 2009. The law addresses the costs to the state and others of employers’ characterizing workers as independent contractors, when they are actually employees.
An employee, unlike an independent contractor, is covered by workers’ compensation insurance and unemployment insurance, as well as many laws forbidding discriminatory actions in the workplace. In addition, an employer pays FICA contributions based on 7.65% of the employee’s pay, while an independent contractor pays that amount to the federal government in the form of self-insurance tax. The additional direct financial effects, as well as the anti-discrimination protections, explain why some employers prefer to treat their employees as independent contractors. And certainly as the title of the law indicates, there has been abuse of the system. Governor O’Malley’s July 14 executive order states that audits show that about one out of five Maryland employers misclassifies employees as independent contractors. On the other hand, in certain arrangements, the line between employee and independent contractor is not easy to draw. Moreover, the line may be drawn differently depending on whether state or federal law applies. The new law attempts to clarify just when a worker is exempt, or may properly be classified as independent.
This new law specifically targets only the construction and landscape service industries. The misclassification of an employee as a contractor is still illegal and subject to enforcement activities in other industries; the Department of Labor, Licensing and Regulation has taken action to require employers to pay unemployment insurance contributions on its workforce if the Department finds that the workers were illegally categorized. Under this law, however, as well as the recently issued executive order from Governor O’Malley, the enforcement mechanisms are beefed up and backed up with some funding. The newly constituted task force will investigate and coordinate with the federal government and businesses, including suggesting ways to improve enforcement efforts.
The new law also imposes a civil penalty of up to $5,000 per misclassified employee, which amount is subject to doubling for a second offense and quadrupled for a fourth offense. In addition, all employees found entitled to restitution will be granted an award, which may be tripled, as for violations of wage and hour laws. Retaliation against employees for making complaints about violations of the law is prohibited.
If no state agency takes action, or if the action is pending, an individual who was harmed by a violation of the act can bring his or her own civil suit, and seek trebled damages and attorney’s fees. The lawsuit is unavailable if a final order or judgment of the Office of Administrative Hearings or a court has been entered on the same facts. The private right of action is important since, even with additional funding, if fully 20% of Maryland employers are misclassifying employees, then the executive branch cannot prosecute every violation.