The Florida Department of Revenue is the latest state agency to sign a memorandum of understanding with the U.S. Department of Labor seeking to prevent employees from being misclassified as independent contractors (ICs). This latest federal-state partnership was announced earlier today by David Weil, the new Administrator of the Wage and Hour Division of the U.S. Department of Labor. Dr. Weil re-stated the oft-articulated message from governmental leaders that misclassification of employees as ICs “deprives workers of rightfully earned wages and undercuts law-abiding businesses.” But he also reiterated that business models that “attempt to change . . . the employment relationship through the use of independent contractors are not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy . . . .” This is a welcome message to businesses that rely upon the use of bona fide ICs to supplement their workforce and for those companies that are built almost entirely on an IC model.

According to the press release, the memorandum of understanding will “coordinate compliance with both federal and state laws alike” by the Florida and federal governments. The agreement, though, was not made available to the public yet.

Notably, each of the agreements with the other 18 states has been signed by one or more workforce agencies, such as the state labor department or workforce division. Curiously, the only Florida agency that signed this agreement was the state’s revenue department. Although it has responsibility for collecting state unemployment insurance, the Florida Department of Revenue has no role in matters such as violations of the state’s minimum wage and overtime laws, which are often implicated when businesses are found to have misclassified employees as ICs. If we are able to determine why the Florida Department of Labor is not a party to the state’s agreement with the U.S. Department of Labor, I will provide an update to this blog post.

Thirteen of the 19 states that have signed a memorandum of understanding with the U.S. Department of Labor either signed in 2014 or renewed their agreements last year. (California’s and Hawaii’s agreements expired in the second half of 2014 and have yet to be renewed.) In addition to Florida, the states with a memorandum of understanding that is currently in effect are Alabama, Colorado, Connecticut, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Utah, Washington, and Wyoming.

Three Takeaways

1.  The crackdown on IC misclassification has expanded into the Southeast.

Florida is the first state to sign a partnership with the federal Labor Department in 2015, but it signifies a growing crackdown on illegitimate IC misclassification by states in the Southeast, as it joined Louisiana and Alabama as signatories to these types of federal -state partnerships. Companies that conduct business in that region of the country should expect those states that have signed partnership agreements with the federal government to more closely scrutinize IC relationships to determine if they involve “legitimate independent contractors,” to use Dr. Weil’s phrase.

2.  An oft-overlooked form of IC misclassification exposure: unemployment claims

The Florida Department of Revenue’s signature on the memorandum of understanding focuses attention on one type of IC misclassification exposure that many businesses tend to overlook – liability for state unemployment insurance taxes. As I have noted in prior blog posts, unemployment claims create more legal challenges to a company’s use of ICs than any other types of administrative or judicial claims. In my February 5, 2013 blog post entitled “Unemployment Benefit Claims and Independent Contractor Misclassification Liability: A Single Claim by One Worker Can Lead to Disastrous Results,” I outlined how “a single claim won by a misclassified employee for unemployment benefits can lead to the beginning of an array of IC misclassification claims dealing with the company’s other ICs – unless the company engages in best practices.”

I have also noted in my White Paper, which details how companies can minimize the risks of IC misclassification, that “If a business has not paid unemployment contributions to a state fund on behalf of that worker, the initial determination can have the same effect as an adverse audit.” In addition, I noted that once a single worker is found to have been misclassified, the business is then normally charged for unpaid contributions for “all similarly situated” workers, along with costly penalties and fines.

An adverse unemployment determination can also be followed by class action claims for unpaid overtime or minimum wages and/or unpaid employee benefits, as shown by the infamous “Massachusetts Franchise Case” – one of the cases we covered in my February 3, 2013 blog post. That case began as a claim for unemployment benefits by a single janitorial worker who merely claimed he should be eligible for unemployment because he was misclassified as an IC, yet eventually spurred costly litigation lasting over five years against a cleaning company that required him and other custodians to sign franchise agreements.

3.  How to minimize IC misclassification liability

Businesses that wish to minimize IC misclassification liability and legitimize their use of independent contractors can use a process such as IC Diagnostics™ to achieve such results. This can start with an assessment of the company’s current level of IC compliance as measured on the IC Compliance Scale™. Depending on the level of IC compliance, alternatives to enhance compliance with IC laws may include restructuring, re-documentation, reclassification, or redistribution.

Where restructuring is suitable, some businesses may need only a little while others may benefit from moderate to substantial restructuring to enhance the likelihood of a successful defense to an unemployment proceeding and other IC misclassification challenges.

Regardless of whether a business’s IC relationships need restructuring or not, documentation of the IC relationship can be critical under most state and federal laws governing the status of workers. Many IC agreements have not been updated since the crackdown on IC misclassification began in 2007 or were never drafted in a manner that minimizes IC misclassification liability. Thus, re-documentation of the IC agreement, including use of state-of-the-art provisions keyed to the relevant legal tests for IC status and the 48 Factors-Plus™ is an essential aspect of IC Diagnostics™.

Other compliance alternatives – reclassification or redistribution of ICs – are more fully described in my White Paper.

Many companies utilizing ICs are well aware that they may not be in full compliance with laws affecting ICs, but find themselves in a form of corporate paralysis, unaware that there are a number of ways they can minimize or avoid IC misclassification liability. For most of those businesses, IC compliance – not only in the areas of labor and tax laws, but also in the area of employee benefits law – is readily attainable under IC Diagnostics™.

Written by Richard Reibstein.