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Michigan addressing Independent Contractor misclassification

May 3, 2019

By Michael Burns, courtesy SBAM Approved Partner ASE

Joint employment, independent contractors, and worker misclassification confusion has been an ongoing federal concern. New federal joint employer regulations were published by the U.S. Department of Labor late last month.

The new federal regulations try to simplify the tests to determine if a business and the contractor(s) they may hire to do work (or the franchise they set up) are engaging in a legal relationship as such, or alternatively, may be in fact be joint employers. If they are joint employers, the “parent” company will find itself with broader responsibilities and liabilities toward the business or franchise.  The Obama administration had sought to erase the traditional, legal lines and virtually eliminate most contractor and franchise relationships. The new rules bring back “independence” between the businesses.

Misclassification of independent contractors is not just a federal concern. Last week, Michigan Attorney General Dana Nessel announced her office will be targeting employers that “cheat their employees of wages” by engaging them as independent contractors rather than employees. To do so, her office is establishing a Payroll Fraud Enforcement Union to investigate what they consider as “wage theft”.

Wage theft includes the situation when an employer engages an independent contractor that otherwise should have been “employed” rather than “contracted” with. Employed means payrolling, collecting and submitting taxes, recordkeeping, paying by hours worked versus by the job, and much more. Contracting means just signing an agreement with the vendor and paying them their fee when the job is completed. The Attorney General’s office stated that they were primarily concerned with nonpayment of overtime that may be worked.

Attorney General Nessel listed the industries where violations were commonly found. These are construction, landscaping, janitorial services, child care, beauty and personal care services, retail, food services, car wash, and home health care industries.

The problems resulting from misclassification of independent contractor status are not only loss of tax dollars to the state and federal government, but also the alleged creation of an uncompetitive business environment because independent contractors are a less expensive alternative.  By using them a company can bid 20 – 30% under companies that employ legitimately. The cost of misclassification to workers was estimated to be $419 million between 2013 and 2015.  It’s estimated to have cost the state $107 million per year in tax revenue.

In addition to the above enforcement activity, Democrats intend to introduce legislation this year increasing civil and criminal wage-theft penalties as well as improve whistleblower protections, audit violators, and require employers in violation of the law to pay back wages if they are caught.  

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