On February 1, 2015, the Joint Enforcement Task Force on Employee Misclassification issued its Annual Report. The Report noted that the New York Task Force members in 2014 conducted over 12,000 audits and investigations, resulting in detection of employee misclassification involving over 133,000 workers. Those and other enforcement efforts in 2014 in New York culminated in the discovery of $316 million in unreported wages, leading to assessments of $40.4 million in unemployment insurance contributions. Since 2007, joint enforcement activities in New York have identified made unemployment insurance assessments on nearly $2.1 billion in unreported wages.
The Task Force defines employee misclassification as comprising both misclassification of employees as independent contractors, and unreported employment or “off-the-books” work. The Report notes that independent contractor misclassification arises because employers believe that certain workers paid on a 1099 basis meet the standard for independent contractor status (i.e., unintentional misclassification) or they may deliberately misclassify their employees in order to evade regulations protecting employees and associated payroll and unemployment taxes (i.e., intentional or willful misclassification).
This is the first Annual Report of the Task Force since the enactment of the New York State Commercial Goods Transportation Industry Fair Play Act, which became effective April 10, 2014. That law was the subject of a number of my blog posts, the last one on April 30, 2014. The Task Force Report noted that since the effective date of the new law, the New York State Department of Labor completed 118 audits/investigations of employers in the commercial goods transportation industry, 25 of which were initiated based on tips and another 25 based on random selection of businesses.
The Task Force Report described the efforts by the Department of Transportation, the New York State Thruway Authority, and the Department of Labor to distribute the required posters across New York State including at warehouse locations. The required posters are available at https://www.labor.ny.gov/formsdocs/ui/IA998.pdf.
Of particular interest in this 2014 Task Force Report is the listing of the “top dozen” industries and businesses that the Task Force has found to have the “highest incidence of worker misclassification” in New York in 2014:
- Professional, Scientific and Technical Services;
- Construction of Buildings;
- Food Services and Drinking Places;
- Publishing Industries;
- Administrative and Support Services;
- Specialty Trade Contractors;
- Ambulatory Health Care Services;
- Personal and Laundry Services:
- Performing Arts, Spectator Sports, and Related Industries;
- Educational Services;
- Motion Picture and Sound Recording Industries; and
- Merchant Wholesalers and Nondurable Goods.
Analysis and Takeaways
New York has been at the forefront of independent contractor misclassification since 2007 when the Governor established the Joint Enforcement Task Force on Employee Misclassification. As reported in my blog post of September 16, 2014, New York was one of 19 states that received grants totaling $10.2 million in federal funds from the U.S. Department of Labor to increase the capabilities of state unemployment insurance tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report wages paid to workers.
New York has also been active in passing legislation designed to curtail independent contractor misclassification in industries where it is perceived to be prevalent, enacting the Construction Industry Fair Play Act in 2010, as described in my blog post of September 2, 2010, and (as mentioned above) the Commercial Goods Transportation Industry Fair Play Act in 2014.
Legislatures around the country have looked to states such as New York in crafting state legislative bills to curtail independent contractor misclassification, and regulatory agencies in other states have sought to emulate regulatory misclassification enforcement initiatives that New York has conducted for years. The success in detecting misclassification in New York is likely to provide a greater impetus to other states in cracking down on intentional and unintentional independent contractor misclassification.
Businesses that are either built on a 1099 model or use independent contractors and other on-demand and contingent workers to supplement their workforce have at least three alternative courses of conduct to enhance their independent contractor compliance. As noted in my White Paper, businesses, non-profits, and governmental units can minimize their independent contractor misclassification liability by (a) restructuring, re-documenting, and re-implementing their independent contractor relationships; (b) reclassifying their 1099ers, either voluntarily or through an IRS program; or (c) redistributing their independent contractors through the use of reputable and knowledgeable contingent workforce management and staffing solution companies.
In deciding which alternative to choose, such organizations can make use of a program such as IC Diagnostics™. None of those alternatives are painless, and each takes dedicated commitment, resources, and considerable management time and attention. But, the process need not be daunting. The only alternative that is universally regarded as unwise is continuing the status quo.
For states like New York, organizations that use 1099ers but fail to do so in a manner compliant with state law represent a source of previously unreported wages and leads to assessments of unemployment and workers’ compensation contributions as well as tax penalties, interest, and assessments. Failing to enhance independent contractor compliance can also generate ancillary liabilities including exposure to class action lawsuits seeking unpaid overtime, minimum wages, and benefits. These are detailed in hundreds of cases reported in my monthly updates of independent contractor compliance and misclassification.
Written by Richard Reibstein.