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.

Agreements to agree clauses: just say no

Like drugs, clients should just say no to “agreement to agree” clauses in most cases. These clauses appear when parties to a business relationship are too lazy, too tired, or simply want to avoid a complex issue. The usual form is something like this: “The parties will agree in the future on pricing and discounts for third party distributors.” Lawyers hate these clauses. Why? First, there is a body of cases in Maryland that address the issue of determining the obligation this imposes on each party. Does it mean that they must negotiate in objective good faith? Subjective good faith? Both? What happens if one party, now having discovered they made a bad deal, wants out of the agreement? Can this clause be used to “stonewall” the other party? The short answer under Maryland cases is that if you do not specify the obligation, the court will probably apply the objective theory of contracts and require objective good faith negotiations. However, all this does is engender higher litigation costs.

Second, agree to agree clauses allow parties to a contract to rush into a relationship without fully understanding the ramifications or addressing key business points. Can I put you in this car today, it’s on sale? Almost nothing good comes from rushing a deal. While clients often view negotiations over the smaller points that might seem to call for agree to agree clauses as lawyers delaying, or trying to run up the bill, a competent lawyer has only one goal in mind – to clearly, concisely, and unambiguously, define the legal relationship between the parties. Achieving that goal results in substantially reduced litigation bills if a dispute arises. In a sense the first contractual relationship between parties can often be viewed as the building block of the next negotiation – which might come in good times, or might come in times of dispute. We have to plan for the worse.

Third, pushing material issues to agree to agree clauses can actually impact other, agreed upon terms. Often the parties will negotiate on some points and reach consensus, but then be unable to decide on one issue or simply think that it is unimportant and not even address it – and when they discover (often later) what the other party was thinking, it can affect the other terms and provisions that they did agree to. For example, if two parties agree on a direct use fee but do not agree on a sublicense fee, and then later, when a material sublicense is proposed, one party suggests a very high rate and the other a very low one . . . you have the making of a disaster.

Finally, agree to agree clauses, particularly on a material term, often are agreed to without any process or mechanics around dispute resolution. The most common process is to allow for a cooling off period, followed by third party resolution, mediation or arbitration. For example, if at the time of the initial negotiation the value of an equity interest is not critical, but knowing that value at the inception of the deal could become critical at a later date, then some process needs to be designed around what happens when the time comes for the parties to sit down and agree, but they cannot agree. We see many contracts that were “90% negotiated” like this but that last 10% can be a real mess to clean up later.

For further information on this issue, please contact Mike Oliver at oliver@bowie-jensen.com.

Get Your Team in Place.

If you are new to running your own business, here is a bit of advice we have been giving to clients here at Bowie & Jensen for almost 20 years: get your professional team in place as soon as possible. All businesses, especially small businesses, need a good solid team of professionals to help them from the start.

A C.P.A. to advise on tax,accounting and financial issues; a banker to help with capital needs and cash flow management; an insurance advisor to help with health, property and casualty, and malpractice insurance if appropriate, not to mention life and key man insurance; and finally a lawyer to help with choice of entity, entity formation, leasing, employment, trademarks, contract and other legal issues that come up in each business.

We advise that you be very skeptical of any one person or firm that claims to be able to supply players for more than one position on your team. It is very hard to be good in one area, and exponentially harder to be good in two or more. Make sure your team members know and respect each other. You want them pulling together in your best interest, not trying to prove to you that they are the smartest or most valuable member of your team. Finally, use your team to help you gather information, analyze it and make decisions to move your business forward.

Getting the team in place from the start allows you to establish a solid foundation for your business. Please contact Mark Jensen at jensen@bowie-jensen.com for more information on this topic.