Regulations

New North Carolina Law Reminder to Avoid Worker Misclassification

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On December 31, 2017, the North Carolina Employee Fair Classification Act (EFCA) took effect. The new law allows for heightened investigations into those employers that are allegedly misclassifying their workers as independent contractors rather than as employees.

The law allows workers to report potential job misclassification cases to a new division within the North Carolina Industrial Commission, known as the Employee Classification Section (ECS). The new division will provide this information to the state’s Department of Labor, Industrial Commission – Compliance and Fraud Investigative Division, Department of Commerce – Division of Employment Security, and Department of Revenue. Each agency will conduct independent investigations to determine whether violations of their operating statutes have occurred, and, if necessary, will ensure the necessary enforcement actions are taken.

As part of the law, employers must display a poster for employees as part of the law’s public notice requirement. The poster will explain what employee misclassification is, the fact that workers must be treated as employees unless they are independent contractors, and where to report potential misclassification issues.

Misclassification of workers is a significant issue for employers, both at the federal and state levels. For instance, wrongful classifications of independent contractors is in violation of the National Labor Relations Act. According to the National Conference of State Legislators, a growing number of states have addressed employee misclassification. Some of the activity has been from the executive branch, through the creation of state task forces or issuance of state executive orders. State legislatures, however, also have taken steps to hold employers responsible for deliberate misclassification of employees as a means of avoiding taxes and coverage for workers compensation, Social Security and unemployment insurance.

The issue of worker misclassification can play a significant role in exposing companies to tax penalties issued by the IRS through the Affordable Care Act’s Employer Mandate.

Bottom line: North Carolina is not the first state to adopt new laws surrounding misclassification and certainly won’t be the last. As more states join this growing trend, employers nationwide should take measures now to ensure that their workers are properly classified to avoid problems in complying with federal and state regulations. Employers should regularly review individuals who are considered independent contractors to be sure that the scope of work and how that worker interacts with others in the organization is consistent with that classification.

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