If you did not catch the Firm’s notice earlier this year about the new Employee Fair Classification Act (EFCA), now is the time to pay attention. The EFCA is aimed at addressing the growing problem of the misclassification of employees as independent contractors. The law goes into effect December 31, 2017.
From the company’s perspective, there are many benefits to classifying workers as independent contractors, such as not being required to comply with state and federal wage laws, withhold taxes, pay state payroll or unemployment taxes, or provide workers’ compensation insurance. The risk is that, if the worker should have been classified as an employee and not an independent contractor, then, the company will owe back taxes, and could face significant liability for unemployment, workers’ compensation, back wages and the like.
The EFCA formally creates an Employee Classification Section (ECS) within the North Carolina Industrial Commission that will receive and investigate misclassification issues. Upon vetting misclassification claims, the ECS will report suspected misclassification to a number of enforcement and oversight agencies, including the US and NC Departments of Labor (which enforces federal and state wage laws), the Division of Employment Security (which enforces unemployment taxes), the NC Department of Revenue (which enforces payroll and other taxes), and the NC Industrial Commission (which enforces North Carolina’s worker’s compensation laws). Each agency will have greater power, through this flow of information, to investigate and recover any owed taxes and wages, and to issue penalties for failing to comply with applicable laws.
Any company employing one or more workers will be subject to inquiries and audits completed by the EFCA. It is not clear, but I would think that companies who only work with contractors, but which may have misclassified the contractors, would not be able to bypass an investigation pursuant to the EFCA. In other words: Startups, this law may apply to you, too. The EFCA also requires that companies post notices related to this law. The State has not yet issued a standard poster for this law, but should do so before December 31, 2017.
While the year-end to-do list is already too long, a review of employee classifications is likely a “must-have” in light of the EFCA. As a note, the law on this topic has changed significantly over the past several years, so even if workers were correctly classified as contractors at the time of their original engagement, they may not be properly classified under the current law. If you have questions about employee misclassification, please contact me with any questions.