Maryland's New Independent Contractor Misclassification Penalties Take Effect October 1, 2016

The Maryland legislature has joined national efforts to clamp down on misclassification of employees as independent contractors through amendments to the state unemployment law that create interest assessments on unpaid unemployment contributions, civil penalties for misclassification, and cross-agency reporting requirements in the event of an employer’s misclassification of employees.  These new enforcement measures take effect October 1, 2016.

Under the amendments, employers who are found to have misclassified employees as independent contractors will not only be charged back unemployment contributions (as has always been the case), but they will also be assessed 2% interest if the contributions are not paid in full within 45 days of the order to make payment.  Interest will date back to the date payment was initially due.

In addition, an employer who is determined by the Secretary of Labor, Licensing and Regulation (“Secretary”) to have knowingly misclassified an employee will be assessed a civil penalty of $5,000 per employee ($10,000 per employee for subsequent violations).  A person who knowingly advises an employer to misclassify an employee as an independent contractor will be subject to a civil penalty of $20,000.  Under the Act, “knowingly” has been defined as, “having actual knowledge, deliberate ignorance, or reckless disregard for the truth.”  These penalties impose a heightened obligation on employers to conduct due diligence to verify proper classification before entering into independent contractor arrangements, or risk a finding that they “knowingly” violated the law.

Although the assessment and penalties only apply under the Unemployment Law, the Act also provides that that the Secretary will report misclassification determinations to the Worker’s Compensation Commission, the Insurance Administration, Division of Labor and Industry, and the Comptroller.  Maryland’s efforts in preventing and correcting worker misclassification are part of a nationwide effort, spearheaded by the federal Department of Labor, which means that employers can expect further reporting of misclassification determinations to the Department of Labor and other federal agencies involved in this initiative, including the Internal Revenue Service. 

Misclassification affects many different employee rights and employer obligations including, but not limited to, minimum wage and overtime, access to health insurance and other benefits, worker’s compensation, unemployment, and tax withholdings.  Consequently, cross-reporting may have significant consequences for employers if the other agencies choose also to investigate. 

So, what is an independent contractor?  As a general matter, a true independent contractor is one who is in business for himself or herself, who actively manages and promotes his or her business, and who provides services or products to customers, independent of supervision or control by the customer. 

Lawful classification as an independent contractor is not solely established by a contract between the parties.  Rather, the independent contractor relationship is fact-specific and agencies will look to the actual relationship between the parties to determine whether their respective status, roles, rights, and responsibilities support independent contractor classification or if the relationship is functionally one of employer and employee.  Unfortunately, there is no single set of standards to determine independent contractor status, as each agency uses its own multi-factor test.  As a result, classification requires careful analysis of the relationship between a company and its worker, in light of many different factors, to determine the proper classification.  As a legal matter, it is the employer’s burden to prove proper classification and, with these new assessments, penalties, and other consequences, it is incumbent on all Maryland employers to ensure that they have done their due diligence and can defend their classification decisions.

The Act requires the Secretary to issue regulations for the implementation of these changes to establish procedures for findings, audits, and appeal, and provide guidance identifying the evidence used to determine whether an employer has “knowingly” failed to classify an employee properly.

In the meantime, employers should:

  • Identify all independent contractors.
  • Review independent contractor classification criteria.
  • Conduct due diligence to ensure that past and future classification decisions are correct.
  • Carefully consider issues arising from potential reclassification.

Melissa Calhoon Jones, chair of the Labor and Employment Group, counsels companies on employment, labor, and immigration issues.  For more information about independent contractor classification and other employment concerns, please contact Ms. Jones at 410.752.9765 or via email.

This alert has been prepared by Tydings for informational purposes only and does not constitute legal advice.