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In the past year three states have implemented laws that broaden the definition of “employee” and include penalties or additional liability exposure for employers who misclassify their workers: California, New Jersey, and Virginia.
California and New Jersey have both adopted the ABC Test for determining whether a worker is an employee. We previously discussed the details of the ABC Test here. In addition to expanding the definition of employee, California and New Jersey have implemented severe penalties for worker misclassification.
California:
- Employers may be assessed penalties for wage violations associated with misclassification, which could amount to all missed wages and back benefits associated with misclassification.
- Civil penalties of between $5,000 and $25,000 can be assessed against employers for willful misclassification, which is defined as voluntarily and knowingly misclassifying an employee as an independent contractor.
New Jersey:
- Requires an employer to pay the misclassified worker a penalty of up to five percent of the worker’s gross earnings from the prior 12 months.
- Civil penalties of $250 per misclassified worker for the first violation and up to $1,000 per misclassified employee for each subsequent violation.
Virginia has taken a slightly different approach than New Jersey and California. Instead of adopting the ABC Test, Virginia decided to explicitly adopt the current IRS Guidelines as the operative test. In addition to explicitly adopting the IRS guidelines, Virginia created a presumption that all workers for compensation are employees. The Virginia law also carries with it some stiff penalties:
Virginia:
- Give employees a private right of action against employers for misclassification that would allow them to recoup all lost wages and benefits.
- Civil penalties of up to $1,000 per misclassified worker for the first violation, $2,500 per misclassified worker for the second violation, and $5,000 per misclassified worker for the third violation.
While it is still too early to know the scope the true scope of how these laws will impact employers, the financial risk for misclassification is real. In addition to the creation of civil liability penalties and potential lawsuits brought by the individual workers, employers are potentially opening themselves up to significant penalty exposure under the ACA Employer Mandate.
As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), the ACA Employer Mandate, organizations with 50 or more full-time employees and full-time equivalent employees are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to Internal Revenue Code (IRC) Section 4980H penalties. The healthcare law defines full-time employees as workers who average 30 hours of work a week or 130 hours a month.
Smart employers should assess their workforce and incorporate any potentially newly classified employees into their ACA compliance process. Employers will need to extend offers of health insurance coverage to more employees, and reporting requirements will grow in complexity. The volume of forms to be processed will increase, along with the costs associated with distributing 1095-C Forms to employees and submitting required ACA information to the IRS annually.
Failing to get this right can result in penalty assessments from the IRS. The agency is currently issuing ACA non-compliance penalty notices in Letter 226J for the 2017 tax year. Employers should seek out expert ACA compliance consultants to prepare for increased ACA compliance as more independent contractors become full-time employees under the ACA.
