Yesterday, New York Governor Andrew Cuomo signed Executive Order No. 159 expanding the existing Joint Enforcement Task Force on Employee Misclassification into a Joint Enforcement Task Force on Worker Exploitation and Employee Misclassification. Those who follow IC misclassification developments in all 50 states, such as the publisher of this legal blog, were wondering why the annual Task Force Report issued by New York each February 1 for the past eight years had not yet been issued this year.  Executive Order No. 159 tells us why – New York has now subsumed IC misclassification into a subset of “worker exploitation.”

Analysis of the New Executive Order

The Executive Order issued in 2007 establishing the Employee Misclassification Task Force required the Task Force to issue an annual report each February 1; this new Executive Order, however, has no such reporting requirement. Nonetheless, simultaneous with the issuance of Executive Order No. 159, the new and expanded Task Force issued its 2016 Report.

The Executive Order recites in its Preamble the reasons for the Governor’s action, and includes the statement that “an increasing number of employers in New York improperly classify individuals they hire as ‘independent contractors,’ even when those workers should be legally classified as ‘employees’ . . . .” Neither the Executive Order nor the 2016 Task Force Report, though, provide any empirical data or basis on which the Executive Order based its conclusion that more and more employers in New York are either classifying workers as independent contractors or, more to the point, are misclassifying employees as ICs.

The 2016 Task Force Report identifies a number of industries where IC misclassification and/or worker exploitation is regarded as prevalent: nail salons, restaurants, agriculture, car washes, domestic workers, construction, landscaping, dry cleaning, supermarkets, home health care, and retail. Past Task Force Reports have also focused attention on other industries that are the focus of regulators in New York: food services; professional, scientific, and technical services; publishing; performing arts; administrative and support services; spectator sports; educational services; motion picture and sound recording; and merchant wholesalers and nondurable goods.

Notably, there is nothing in the Executive Order or the 2016 Report that recognizes, as the current U.S. Secretary of Labor has said, the value to the U.S. economy from the legitimate use of independent contractors. For example, when Labor Secretary Thomas Perez met earlier this year with Silicon Valley high-tech industry leaders, workers, venture capitalists, and other community leaders, he expressed in his blog post of January 25, 2016 the need to encourage innovation while coming to terms with changes in the world of work, such as the growth of the gig or on-demand economy where independent contractors are prevalent. Secretary Perez wrote: “This is an exciting, entrepreneurial development that is tapping into powerful consumer demand while giving workers flexibility and enabling them to monetize existing assets, like their cars or extra rooms in their homes. At the same time, the on-demand economy raises important questions about how to continue upholding time-honored labor standards and how to promote economic security for American workers in a changing labor market.”

Similarly, while the Administrator of the Wage and Hour Division of the U.S. Labor Department has used his office to combat the illegitimate use of ICs, Dr. David Weil has stated that “the use of independent contractors [is] not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy.” Indeed, the current DOL Misclassification website contains the following “balanced” view about the use of legitimate ICs:  “The Department supports the use of legitimate independent contractors, who play an important role in our economy, but when employers deliberately misclassify employees in an attempt to cut costs, everyone loses.”

Instead, the New York State Task Force Report appears to have overlooked the fact that the New York Department of Labor and the New York courts have found many instances where a company’s use of ICs has fully complied with the law, and that the New York Labor Department has itself issued Guidelines establishing how businesses can legitimately engage ICs in the state.

Takeaways for Businesses in New York and Other States

New York State has been and 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 instances of employee misclassification identified since 2007 in New York involve businesses that are using legitimate independent contractors but have simply failed to structure, document, and implement the independent contractor relationship in accordance with applicable law and enforcement guidelines.

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 tools and processes. Other alternative forms of compliance available to companies under IC Diagnostics™ includes reclassification and redistribution of workers, as more fully described in my White Paper on the subject.

While the industries identified in the latest and more recent Task Force Reports 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 or should 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 comprehensive tools designed to enhance and maintain IC compliance.

None of the three alternative methods of IC compliance are entirely painless, and each takes dedicated commitment, resources, and considerable management time and attention. One-size-fits-all approaches usually are ill-fitting and provide little if any genuine protection. But, whether a business that is not running at a heightened level of IC compliance chooses the restructuring, reclassification, or redistribution alternative, the process need not be daunting. The only alternative that is universally regarded as unwise for such companies is continuing the status quo.

Written by Richard Reibstein.