Signed in 2009, the Maryland Workplace Fraud Act is intended to curb the illegal misclassification of construction and landscaping employees as independent contractors. The Act has generous relief provisions and stiff penalties. It evidences the government's view that workplace fraud should be eliminated.
This article by TELG principal & general counsel Nicholas Woodfield was published by Maryland State Bar Association Section of Labor and Employment Law Newsletter on December 1, 2010. The full article is available at Maryland State Bar Association Section of Labor and Employment Law Newsletter.
Maryland State Bar Association Section of Labor and Employment Law Newsletter
Maryland Workplace Fraud Act and the Misclassification of Construction and Landscaping Employees
Read more at Maryland State Bar Association Section of Labor and Employment Law Newsletter »
By Nicholas Woodfield, Principal, The Employment Law Group®
On May 7, 2009, Governor Martin O’Malley signed the Maryland Workplace Fraud Act (“MDWFA”) into law, providing construction and landscaping employees who are misclassified as independent contractors by their employer with the right to bring a private action in court. Additionally, the MDWFA grants the Maryland Commissioner of Labor and Industry new powers to investigate and punish employers who misclassify their employees as independent contractors or do not classify them at all. The MDWFA took effect on October 1, 2009, and it is intended to protect and empower Maryland workers while also leveling the playing field for those employers who play by the rules.
The Incentive for Employers to Misclassify
Employers often intentionally misclassify employees as independent contractors for a host of reasons. An employer who intentionally misclassifies an employee as an independent contractor does so attempting to avoid, inter alia, the following costs associated with employment:
- paying minimum wages;
- paying overtime;
- paying the payroll tax;
- paying worker’s compensation;
- paying unemployment;
- paying social security;
- offering or subsidizing employee health benefits;
- offering paid leave; and
- offering Federal Family and Medical Leave Act (FMLA) unpaid leave.
By misclassifying employees as independent contractors, employers reduce their Federal Insurance Contributions Act (FICA) costs, unemployment contributions, workers’ compensation insurance costs, and benefits contributions. As the result, misclassified employees are wrongly denied access to unemployment insurance, workers’ compensation, and other protections, and Maryland taxpayers are deprived of millions of dollars to the Unemployment Insurance Trust fund and the State General Fund.
A Misclassification Gamble
Employers also often misclassify to avoid paying employees overtime wages at the rate of time and a half. If an employer is caught misclassifying employees, the litigation costs and other penalties can far outweigh any temporary cost savings to the employer. For instance, under the federal Fair Labor Standards Act of June 25, 1938, Chapter 676, 52 Stat. 1069, 29 U.S.C. § 201, et seq. (FLSA), employees may file a private action against employers who fail to pay them properly. Employees who prevail under the FLSA are entitled to liquidated damages of an additional amount equivalent to the unpaid wages due to the employee. For example, if an employee is awarded $10,000 in unpaid wages, he or she may be entitled to an additional $10,000 of liquidated damages, bringing the total recovery to $20,000. These damages are awarded instead of interest.
An employer can avoid paying liquidated damages only if it shows that it acted in good faith and that it had a reasonable basis to believe its practices complied with the MDWFA. “Good faith” has a special meaning under the FLSA, and it requires that employers have made a specific investigation into the application of the FLSA to the particular situation. A prevailing employee is also entitled to an award of reasonable attorney’s fees and costs, which can far exceed the unpaid wages awarded to the employee. Moreover, the IRS may assess penalties for employee misclassification stemming from an employer’s nonpayment of federal employment taxes and failure to withhold income taxes.
In addition to the foregoing federal remedies, the MDWFA grants construction and landscaping employees even further remedies against employers who misclassify their employees, as a prevailing employee can recover not only their unpaid wage differential, but also, inter alia, an additional amount up to three times the “economic damages” if the employer knowingly misclassified the individual.
In fact, the MDWFA grants individuals a private right of action to file suit in court to challenge their classification if a final order has not been issued by another court or administrative unit. The action must be filed within three years after the date the cause of action accrues. The court may award a prevailing misclassified employee the following:
- “Economic damages” including unpaid wages and benefits;
- An additional amount up to three times the “economic damages” if the employer knowingly misclassified the individual;
- Reasonable attorneys’ fees and litigation costs; and
- “Any other appropriate relief.”
The amount of an award under the MDWFA could be thus be quite substantial, because it includes the cost of litigation and potentially the costs of the unemployment benefit if the employer laid off the employee.
§ 3-903: The Employer-Employee Test
Under section 3-903 of MDWFA, it is illegal for an employer to improperly classify an individual. Whether or not the employee agreed to work as an independent contractor does not factor into the test.
The MDWFA presumes an individual is an employee unless the employer demonstrates that:
- the individual is free from the control and direction of the employer;
- the individual is engaged in an independent business or occupation;
- the work is “outside the usual course of business” for the employer; and
- the work is performed outside the employer’s place of business (not including worksites).
Work is “outside the usual course of business” if it is performed offsite, does not integrate into the employer’s operation, or is entirely unrelated to the employer’s business.
The MDWFA also defines a special class of “exempt” individuals who are not presumed to be employees. “Exempt” individuals:
- perform services in a personal capacity employing no one else other than their children, spouse, or parents;
- perform services free from the direction or control of the employer;
- furnish their own tools and equipment;
- operate complete control over the management and operation of their business; and
- may work for other entities at the individual’s sole choice and discretion.
The test in this statute, while not identical, is very similar to federal tests for the employer-employee relationship.
§ 3-904: Bad Faith Misclassification of Employees
The MDWFA contains stiffer penalties for employers who act in bad faith. Under section 3-904 of the MDWFA, it is illegal for an employer to knowingly misclassify an individual. The statute defines “knowingly” as having actual knowledge, acting in deliberate ignorance, or acting in reckless disregard of the truth. Furthermore, the statute lists what is “strong evidence” that an employer did not know it was misclassifying employees:
- the employer sought evidence that the individual is exempt;
- the employer sought evidence that the individual is an independent contractor who withholds and reports payroll taxes, pays unemployment insurance taxes, and maintains workers’ compensation insurance;
- the employer provided the individual with a section 3-914 written notification of the individual’s classification; or
- the employer classifies as independent contractors all workers performing substantially the same work as the individual, reports those workers’ income to the IRS, and has received a determination from the IRS that the individual is an independent contractor.
The IRS will give an opinion on the classification of an individual if asked either by the employer or, alternatively, by the individual. Exercising this degree of due diligence is strong evidence that the employer did not know it was misclassifying employees. Additionally, under section 3-914 of the MDWFA, the employer is required to provide each individual classified as an exempt person or independent contractor with notice of that classification (written in both English and Spanish) explaining the implications of that individual’s classification. For up to three years, the employer must maintain records of the individual’s classification, evidence supporting the classification, and the individual’s occupation, rate of pay, hours, and other information. The employer who inadvertently misclassifies an employee can avoid stiffer penalties by showing it had acted in good faith.
§ 3-912: Anti-retaliation Protections
It is also illegal for the employer to discriminate or take an adverse employment action against any individual who:
- Files a complaint with the employer or the Commissioner alleging violations under this statute;
- Brings an action in court under this statute; or
- Testifies in an authorized action under this statute.
Adverse employment actions likely include termination, suspension, demotion, reduced hours, threatened adverse employment actions, harassment, or any conduct that would dissuade a reasonable employee from reporting violations. The employee must file his or her complaint with the Commissioner within 180 days of the retaliation. The Commissioner may then investigate and file a complaint in circuit court on the employee’s behalf to reinstate the employee with back pay and “other appropriate damages or relief.”
§ 3-916: Claims Filed in Bad Faith
The Commissioner must also investigate any allegations that a person is acting in bad faith when they make an allegation of workplace fraud. Under section 3-916, a person may not:
- Make or cause to be made a groundless or malicious complaint;
- In bad faith, bring an action under this statute; or
- In bad faith, testify in an action under this statute.
The Commissioner must issue violators a citation with the option for a hearing. Violators are subject to a civil penalty not exceeding $1,000, and the prevailing employer may be entitled to recover attorney’s fees. Additionally, if the violator is alleged to be employed by the employer, the Commissioner must report the identity of the violator to the employer.
The Commissioner’s New Powers
The Commissioner of Labor and Industry is charged with enforcing Subtitle 9 of the MDWFA and may investigate potential violations on his or her own initiative. The Commissioner may:
- Conduct confidential investigations;
- Enter an employer’s place of business or worksite to observe work being performed, interview individuals, and copy records;
- Require an employer to produce records related to their classification of employees; and
- Issue a subpoena for testimony or the production of records.
Investigations must be confidential, and the Commissioner must issue a citation to any employer he or she determined has violated the statute. Additionally, the Commissioner must generate an annual report detailing his or her enforcement efforts under this statute.
Citation Administrative Procedures
At the close of an investigation, the Commissioner must issue a citation to any employer the Commissioner determines has violated the MDWFA. The Commissioner must also provide notice of the citation to other state agencies to which the employer may now owe taxes. If the employer is engaged in a contract with a “public body,” the Commissioner must promptly notify the “public body” of the citation. The “public body” must then withhold an amount that is sufficient to pay restitution to each employee for the full amount of wages due and to pay any benefits, taxes, or other contributions that are required by law to be paid on behalf of the employee.
Within fifteen days of receiving notice of the citation, an employer may request a hearing before an Administrative Law Judge. The ALJ’s decision is a final order of the Commissioner, but either party may be appeal and seek judicial review in court.
§§ 3-908 and 3-909: Civil Penalties
The MDWFA includes potentially stiff penalties to deter employers from acting in bad faith when classifying workers. A penalty is only assessed if – by a final order of a court or administrative unit – the employer is found to have misclassified employees. If the employer is found to have unknowingly misclassified employees, the employer will be assessed a penalty up to $1,000 for each misclassified employee only if the employer fails to come into compliance in a timely manner. Alternatively, if the employer is found to have knowingly misclassified employees, the employer will be assessed a penalty up to $5,000 for each misclassified employee. On the employer’s second offence, the employer will be assessed a penalty up to $10,000 for each misclassified employee and on further offenses the employer will be assessed a penalty up to $20,000 for each misclassified employee. The court or administrative unit considers the following factors when deciding the amount of the penalty:
- The gravity of the violation;
- The size of the employer;
- Whether the employer acted in good faith;
- The employer’s history of violations;
- Whether the employer has deprived the employee of rights the employee is entitled to under state labor law; and
- Whether the employer has made restitution and come into compliance with state laws.
Each time the employer knowingly violates the statute, the limit on the assessed penalty doubles up to a maximum limit of $20,000 per misclassified employee.
§ 3-915: Use of Business Arrangements
No person may use (or conspire to use) business arrangements, foreign or domestic, to facilitate, or evade detection of, a violation of this statute. The Commissioner must issue violators a citation with the option for a hearing. Violators are subject to a civil penalty not exceeding $20,000, unless the person is a lawyer or CPA performing an act in the ordinary course of his or her license. In such case the Commissioner must instead report lawyers and CPAs to their respective state regulators.
The MDWFA is intended to curb the illegal misclassification of construction and landscaping employees as independent contractors. The MDWFA’s penalties are stiffer than the penalties available under other wage nonpayment statutes, and the tenor of the statute evidence that the Maryland General Assembly and Governor’s Office have come to view workplace fraud as a problem that allows offending employers to undercut competitors who play by the rules, to deny workers critical workplace protections only guaranteed to employees and to deprive taxpayers of critical dollars. By increasing damages awards available to affected employees and by shifting attorney’s fees and costs in successful actions to the offending employers, the Maryland General Assembly and Governor’s Office have also sent a signal that they want employees and their lawyers to pursue these cases to help eliminate workplace fraud in Maryland.