The Workplace Fraud Act

The Workplace Fraud Act (“Act”), which became effective October 1, 2009, gives Maryland’s Department of Labor, Licensing & Regulation sweeping powers to investigate the misclassification of construction and landscaping industry workers as independent contractors, imposes a presumption that workers in these industries are employees and imposes penalties on employers for misclassification. It also imposes certain notice and record keeping obligations on employers. Specifically, the Act requires that:

(1) when hiring an independent contractor you must give written notice, in English and Spanish, of their classification, including an explanation of the implications of being classified as an independent contractor rather than an employee; and

(2) employer shall keep the following records for each worker classified as an independent contractor for at least 3 years: name, address, occupation, and classification, method of payment and the amount paid each period, hours worked each day and each workweek and evidence that the individual qualified as an independent contractor.

Finally, the Act creates a private cause of action for misclassified workers against their employers.

The net result of worker misclassification is that employers avoid paying payroll taxes, unemployment insurance taxes, and workers' compensation premiums. These lost revenues, particularly to Maryland’s underfunded Unemployment Insurance Trust Fund, are fueling increased enforcement in this area.

To determine whether a worker qualifies as an employee or an independent contractor, Maryland uses the “ABC test.” This three pronged test, under which an employer-employee relationship is presumed unless the individual performing the work is an exempt person under the Act or the employer demonstrates that:

The individual is free from control and direction;

The individual customarily is engaged in an independent business of the same nature; and

The work is outside of the usual course of business of the employer or performed outside of any place of business of the employer. Work is "outside the usual course of business" if the individual: 1) performs the work off the employer's premises; 2) performs work that is not integrated into the employer's operation; or 3) performs work unrelated to the employer's business.

The law gives the Commissioner of the DLLR authority to investigate workplace fraud in the construction and landscaping industries including the powers to: (1) enter the employer's place of business for purposes of investigation; (2) require the production of records; (3) issue subpoenas for records and testimony; and (4) pursue judicial relief and the assessment of fines for an employer's failure to comply. If the DLLR determines that a worker has been misclassified, it will notify Maryland’s Comptroller, Unemployment Insurance Fund and the Workers’ Compensation Commission and the employer will have to pay restitution including unpaid payroll taxes, unemployment insurance premiums and workers’ compensation premiums as well as other costs including interest associated with the misclassification.

The Act permits an employer who unknowingly misclassifies an employee to come into compliance within 45 days of a misclassification determination by the DLLR without penalty. Failure to comply within 45 days may result in a penalty of up to $1,000 per misclassified employee. On the other hand, employers who knowingly misclassify workers may be subject to a penalty of up to $5,000 per misclassified employee. Previous violators are subject up to double the $5,000 penalty. An employer in violation three or more times may be assessed up to $20,000 per misclassified employee.

For purposes of the penalties enumerated above, the Act defines “knowingly” as an employer having actual knowledge, deliberate ignorance or reckless disregard for the truth. According to the DLLR, in determining whether a violation is “knowing” investigators will review:
“Whether the employer sought, prior to hiring a worker, documentation showing: 1) a sole proprietor's reporting of business income and losses on his personal income tax returns; 2) an independent contractor's withholding of payroll taxes and payment of unemployment insurance contributions and worker's compensation premiums on behalf of all individuals working for him; and 3) the employer provided written notice to individuals of their status or classification and all implications of that status or classification.” Under the law, the State bears the burden of proving a knowing violation.

In the alternative, in the event that a final order has not been entered against an employer pursuant to a DLLR enforcement action, workers may bring a private cause of action for economic damages against an employer for misclassification including attorneys’ fees and treble damages for “knowing” violations. The DLLR is expected to issue regulations in the near future to clarify the requirements and application of the Act.

For questions regarding this or any other employment issue, please contact Nicole Windsor at windsor@bowie-jensen.com.