According to this year’s Annual Report of the New York State Task Force on Employee Misclassification, which was issued on February 1, 2014, the New York State Department of Labor completed in 2013 over 13,000 audits and investigations, in which nearly 127,000 workers were found to have been misclassified as independent contractors in the state and over $55 million in unpaid unemployment contributions were found to be due.  The Report identified the top 12 industries showing the highest incidence of independent contractor misclassification in 2013:

  • Professional, Scientific and Technical Services;
  • Food/Drink Services;
  • Administrative and Support Services;
  • Ambulatory Health Care Services;
  • Construction;
  • Educational Services;
  • Performing Arts, Spectator Sports and Related Industries;
  • Specialty Trade Contractors;
  • Personal and Laundry Services;
  • Couriers and Messengers;
  • Motion Picture and Sound Recording Industries; and
  • Amusement, Gambling and Recreational Industries.

The Joint Enforcement Task Force on Employee Misclassification in New York State was established in 2007, and issues annual reports to the Governor on February 1 of each year.  The Task Force includes the State Department of Taxation, State Department of Labor, State Workers’ Compensation Board, State Attorney General’s Office, and the Comptroller of the City of New York.

In addition to the audits and investigations last year, the Task Force Report notes that its members conducted joint agency enforcement “sweeps” in 2013 at construction sites, bars and restaurants, automotive tire and repair centers, grocery stores, adult entertainment venues, and retail establishments, uncovering over $62 million in unreported wages.

The Report also notes that since August 2007, enforcement and data sharing activities of the Task Force members have identified over 114,000 instances of companies misclassifying employees and discovered nearly $1.8 billion in unreported wages.  One of the many instances noted in the latest Report included a company in Florida that misclassified workers who were utilized as “brand ambassadors” promoting various alcoholic beverages at local bars and restaurants in New York.

The Report lists the Task Force’s “Goals for 2014,” which include “continuing to focus on unemployment insurance fraud and its prevention,” conducting “industry-specific proactive investigations in industries with a high incidence of misclassification,” and “working with other states to pursue employers that operate in multiple jurisdictions.”

Takeaways for Businesses in New York and Other States

New York State remains one of the most aggressive states in identifying independent contractor misclassification. It has enacted two of the most far-reaching misclassification statutes in the country covering two industries where independent contractor misclassification is deemed prevalent in the state:  the construction industry and the commercial goods transportation industry.

Businesses in New York, though, should not regard the state as unfriendly to companies that have a business model using bona fide independent contractors.  Many of the 114,000 instances of employee misclassification identified since 2007 in New York involve businesses that are using legitimate independent contractors but have failed to structure, document, and implement the independent contractor relationship in accordance with applicable law and enforcement guidelines.

Although New York regulators have made strides in identifying and prosecuting misclassification, the 127,000 workers identified in 2013 is undoubtedly a small fraction of all such workers that that are being misclassified by New York companies.  Companies located in New York and other states are encouraged to undertake a process of enhancing their independent contractor compliance before being subjected to audits and investigations by regulators or class action lawsuits for allegedly unpaid wages, benefits, and employee expenses.  One methodology used by an increasing number of businesses is a process such as IC Diagnostics™, which facilitates the restructuring, re-documentation, and re-implementation of an IC relationship in a manner that minimizes IC misclassification liability through the use of compliance tools and processes.

While the dozen businesses identified in the latest Task Force Report run the greatest risk of encountering a sweep, audit, or investigation in New York and other states, no industry is immune these days from governmental scrutiny of workers treated as independent contractors.  Absent a current examination of a company’s level of IC compliance and an effort to enhance same, businesses in New York and other states run an increased risk of exposure to IC misclassification liability.  Those businesses that have taken a proactive approach to their use of independent contractors and have structured, documented, and implemented their IC relationships in a manner designed to enhance compliance are far less likely to be the subject of an audit or investigation by a state or federal labor department, the IRS, or a state unemployment, taxation, or workers’ compensation agency.

A process such as IC Diagnostics™ has also been used by companies that have already been subjected to governmental orders to pay unpaid unemployment contributions, workers’ compensation premiums, or back payroll taxes.  While the kneejerk reaction by such businesses is that they have to reclassify workers found to have been misclassified, there is an alternative: keep the independent contractor model.  How can that be done?  After paying the back charges, many businesses can start fresh through a process of restructuring, re-documenting, and re-implementing their IC relationships using tools designed to enhance and maintain IC compliance.

Written by Richard Reibstein.