Properly classifying employees is once again front and center in the North Carolina General Assembly. Having taken a swing and missed in 2015 at passing legislation addressing the issue, lawmakers took another run at it this past session.
Senate Bill 407, “Employee Misclassification/IC Changes,” sponsored by Sen. Andy Wells (R-Catawba), was passed during the Aug. 3 special session, and sent to Gov. Roy Cooper. Since the legislature did not adjourn for more than 30 days, Cooper has 10 days to act on the bill, not the typical 30.
At issue is whether a company classifies those it employs as employees, or independent contractors. Those classified as employees create an obligation to the employer to pay payroll taxes, unemployment insurance and other costs. Companies avoid those expenses in the case of independent contractors.
Companies who are improperly classifying their employees as independent contractors gain an immediate advantage, particularly in bidding for projects, by virtue of not paying the taxes and in some cases benefits provided to properly classified employees.
The question, “Who is an employee?” has been debated for decades, with even court cases and the Internal Revenue Service trying to create a template.
The typical standard is whether or not the employee has control over their time and where they perform the work, whether they use their tools or those supplied by the employer and whether there are any benefits such as insurance or retirement available to the employee.
The bill in 2015 was filed in response to a lengthy series in a North Carolina newspaper that outlined the vast misclassification of employees, especially among out-of-state contractors and, ironically, newspapers.
That bill was passed by the House, and later by the Senate, which added an amendment that removed a 2003 exemption granted by law to newspapers, that automatically classifies their employees as independent contractors. When the amended bill returned to the House, it died in the House Rules Committee.
Former Gov. Pat McCrory issued executive order 83 in December 2015 that implemented some of what the failed bill was to accomplish. It established the Employee Classification Section with the NC Industrial Commission.
In a statement that accompanied his executive order, McCrory said, “When unethical employers improperly classify their employees as independent contractors, they not only put our state’s workforce at risk, but also put ethical businesses at a competitive disadvantage and rob taxpayers of significant revenues.”
The section was tasked with receiving reports of employee misclassification, working with the Industrial Commission, the Division of Employment Security and the Department of Revenue through liaisons from each and reporting to the governor each year’s activities related to employee misclassification.
Senate Bill 407, passed on Aug,3 puts into statute McCrory’s executive order.
The law formalizes the Employee Misclassification Section in the Industrial Commission. It also allows for clerical staff, investigators and other staff as necessary to carry out its duties which include the following:
- Be available during business hours to receive reports of employee misclassification by telephonic, written, or electronic communication.
- Investigate reports of employee misclassification and coordinate with and assist all relevant State agencies in recovering any back taxes, wages, benefits, penalties, or other monies owed as a result of an employer engaging in employee misclassification.
- Coordinate with relevant state agencies and district attorneys’ offices in the prosecution of employers and individuals who fail to pay civil assessments or penalties assessed as a result of the employer’s or individual’s involvement in employee misclassification.
- Provide all relevant information pertaining to each instance of reported employee misclassification to the North Carolina Department of Labor, the Division of Employment Security within the North Carolina Department of Commerce, the North Carolina Department of Revenue, and the North Carolina Industrial Commission to facilitate investigation of potential violations.
The section is also directed to create a publicly available notice that defines employee misclassification, and also develop means by which to educate employees, employers and the public about proper employee classification and the prevention of employee misclassification.
Also, every state licensing board or commission is to include on applications for licensure a statement regarding employee misclassification, and a place for the applicant to certify that they have read and understand the statement.
One challenge that many talked about in 2015 was how to tangibly enforce the rules regarding employee misclassification. Enforcement of the law will have to rely a great deal on the public to alert them about businesses that are possibly misclassifying their employees.
No mention of newspapers specifically is made in the bill passed in the special session.
Additionally, the bill also requires the Industrial Commission to adopt rules and guidelines under the Worker’s Compensation Act for the utilization of opioids, related prescriptions and pain management treatment.
Further, it removes the requirement that the Industrial Commission study causes of injury and recommend ways to prevent injuries.
And it delays the effective date for the requirement that employers respond to unemployment insurance claims in 10 days, from October 1, 2017 until July 1, 2018.
The bill passed in both the Senate and the House with nearly unanimous bipartisan support, and was sent to Cooper on August 4. Cooper can sign the bill into law, veto the bill or allow it to become law without his signature. If it becomes law, it will go into effect December 31, 2017.