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The North Carolina Employee Fair Classification Act

Ellis Winters

Ellis & Winters

Jeremy M. Falcone

By Jeremy M. Falcone

During the 2015 legislative session, North Carolina devoted a great deal of attention to the employment classifications of independent contractors.  After working its way through several revisions in the House and Senate, The Employee Fair Classification Act was left unfinished at the close of the legislative session.  Given the legislators’ focus on the issue and the progress made during the 2015 session, the bill will likely be revisited during the 2016 session. 

This article discusses the bill as it existed in its fifth and final edition of the 2015 legislative session.  See H.B. 482, adopted Sept. 16, 2015.  It may be revisited during the 2016 legislative session, and its provisions will likely change before becoming law.

The Employee Classification Division

The Act creates an Employee Classification Division within the Department of Revenue.  The Division would receive and investigate complaints of “employee misclassification,” defined as an employer’s avoidance of tax liability by classifying an employee as an independent contractor.  Once the Division determines that a violation has occurred, it could assess civil penalties. 

The Act also requires the Employee Classification Division to coordinate information regarding reported misconduct among various state agencies, including the Department of Labor, the Division of Employment Security, and the Industrial Commission, for investigation of violations of each agency’s policies.

The Act largely describes the Employee Classification Division as a passive investigator of employee misclassifications that have been reported; however, some of the Act’s language contemplates that the Division would affirmatively seek out misconduct.  For instance, the Division’s powers and duties include “develop[ing] methods and strategies for information sharing between State agencies in order to proactively identify possible instances of employee misclassification.”  H.B. 482, N.C. Gen. Stat. § 143-763(7).

Determining Whether an Independent Contractor is Actually an Employee

Once a potential misclassification has been reported or uncovered, the Employee Classification Division would consider ten factors to determine whether an independent contractor has been misclassified:

  1. Whether the individual is engaged in an independent business, calling, or occupation;
  2. Whether the individual is to have the independent use of his or her special skill, knowledge, or training in the execution of the work;
  3. Whether the individual is doing a specified piece of work at a fixed price or for a lump sum or upon a quantitative basis;
  4. Whether the individual is not subject to discharge because he or she adopts one method of doing the work rather than another;
  5. Whether the individual is not in the regular employ of the other contracting party;
  6. Whether the individual is free to use such assistants as he or she may think proper;
  7. Whether the individual has full control over such assistants; and
  8. Whether the individual selects his or her own time, subject to customer requirements.

H.B. 482, N.C. Gen. Stat. § 143—764(a)(1—8).  The Act states that these factors are “intended to codify the holding in Hayes v. Board of Trustees of Elon College, 224 N.C. 11 (1944).”  H.B. 482, N.C. Gen. Stat. § 143—764(c).

The presence of one or more factor does not create employee status, and all of the factors are not required to find employee status.  As the bill worked its way through the House and Senate, these factors changed.  The most recent version removes two factors included in previous versions:  (1) whether the individual has a substantial investment in any equipment or tools required to perform the contracted work; and (2) whether the individual has an opportunity for profit or loss.  These factors were not considered in Hayes.

Civil Penalties

The Act sets civil penalties for employment misclassifications.  An employer is subject to a fine of up to $1,000 per misclassified employee in any three-year period.  The amount of each fine is determined on a case-by-case basis with a focus on the culpability of the employer. An employer can appeal through the Office of Administrative Hearings with a further appeal to the North Carolina Court of Appeals.  The review by the Court of Appeals will be de novo on the facts and the law.  The most recent version of the bill removes the potential for appeal through North Carolina Superior Court contained in prior versions of the bill.

While previous versions of the bill appeared to punish negligent conduct, the most recent version clarifies that only “willful[] or reckless[]” conduct will punished.  However, the Act’s definition of “willful[] or reckless[]” extends only to conduct where an employer “knowingly commit[s] employee misclassification . . . where . . . there is no good-faith argument that such individual was an independent contractor.”  H.B. 482, N.C. Gen. Stat. § 143—765(a).  By limiting sanctionable conduct to “knowing[]” violations, the Act essentially fails to punish reckless conduct.

The Act appears to give employers a free pass for the first violation.  The Act imposes liability only “after [an employer is] assessed any back taxes, wages, benefits, penalties, or other monies . . . as a result of misclassifying one or more employees within the previous three calendar years.”  N.C. Gen. Stat. § 143—765(b).  Only then is the employer subject to fines, and only “for any future instances of employee misclassification.”  Id.  Employers would benefit from clarification that this provision exempts employers from any penalties unless and until they have first been assessed back taxes.

The Act gives employers get a brief amnesty period to report any existing violations.  Self-reported violations before a date certain will not result in any civil fines for employers.  The immunity would not extend to back taxes or other penalties.

The Act also would change the statutory framework of several licensing boards by requiring the boards revoke or deny licenses to applicants with employment misclassification civil penalties.  These changes impact licensing boards for general contractors, plumbers, heating contractors, fire sprinkler contractors, and electricians.  For a license to be denied or revoked, the violation must be willful and without a “good-faith argument that the individual was an independent contractor.”  H.B. 482, N.C. Gen. Stat. §§ 87—11, 87—23, 87—42. 

Violators will also be prevented from having any vendor contracts with the state.

Other Provisions

The Act specifically allows for information regarding reported violations to be shared with district attorneys; however, it does not include any criminal penalties for a violation.

The Act also repeals N.C. Gen. Stat. 97—5.1, which creates a rebuttable presumption that all taxicab drivers are independent contractors.

October 1, 2015
Posted in  News