Identical bills in the House and Senate have been introduced which have a dramatic chilling effect on independent contractors and their clients, as they would significantly increase the regulatory risk and administrative burden of doing business with independent contractors.

Rep. Lynn Woolsey (D-CA-06), Rep. Rob Andrews (D-NJ-01) and Rep. George Miller (D-CA-07) reintroduced the "Employee Misclassification Prevention Act" (H.R. 3178) and Sen. Sherrod Brown (D-OH), Sen. Al Franken (D-MN), and Sen. Tom Harkin (D-IA) reintroduced the "Payroll Fraud Prevention Act" (S. 770), identical companion bills which would amend the Fair Labor Standards Act of 1938 ("FLSA") to increase the financial consequences to a company that misclassifies an individual as an independent contractor and impose new recordkeeping and notice requirements on a company that does business with an independent contractor. Rep. Woolsey also joined with the other Democrat members of the House Education & Workforce Committee recently in proposing that the Joint Select Committee on Deficit Reduction include this Act as part of its final product.

In the last Congress, Rep. Woolsey and Sen. Brown introduced nearly identical bills as H.R. 5107 and S. 3254.

Enhanced financial consequences of worker misclassification
The bills would make any failure to accurately classify an individual as an employee an FLSA violation.  They also would double the amount of liquidated damages the FLSA imposes for a violation of its minimum-wage or overtime requirements with respect to an individual who was misclassified as a non-employee.

A company would be subjected to a new civil penalty of up to $1,100 for each individual whom the company misclassifies as a non-employee, or with respect to whom the company violates the FLSA’s minimum wage, overtime or recordkeeping requirements. The maximum penalty would increase to $5,000 for a company that repeatedly or willfully commits such violations.

A non-employee would be defined as: an independent contracto; whom the company engages in the course of the company’s trade or business for the performance of services; and with respect to whom the company is required to file an Internal Revenue Service (IRS) Form 1099. The term non-employee also would include an individual who provides services to the company through another entity if: the individual has an ownership interest in the entity; the maintenance of the entity is a condition for the provision of services to the company; and the company would be required file a Form 1099 for the entity if it were an individual.

New recordkeeping and notice requirements for clients of independent contractors
A research company that does business with a non-employee would be required to make, keep, and preserve records of: (i) the non-employee; (ii) the remuneration and hours worked by the non-employee; (iii) certain new notices the bill would require the company to provide to non-employees; and (iv) an "accurate classification of the status" of the non-employee. 

A company would not be required to maintain records for any employees or non-employees engaged by a non-employee with whom it does business, such as non-employees or second tier employees, unless the non-employee provides the company with such records during the course of the company’s trade or business.

A company would be required to provide a new notice to each non-employee (and also to each employee) that:

  • informs an individual of the individual’s classification (as an employee or independent contractor),
  • contains specified information concerning the DOL and its website,
  • includes an explanation of an individual’s rights under the FLSA and how such rights differ for employees and independent contractors,
  • solicits individuals to contact the DOL for questions or concerns about their possible misclassification, and
  • provides additional information to be specified by the DOL. 

Burden of proof
If a company fails to comply with the new recordkeeping or notice requirements with respect to an individual, the individual would be presumed to be employee of the company, which presumption could be rebutted only by clear and convincing evidence of the individual's independent contractor status.

Anti-retaliation protection
The Acts would create new anti-retaliation protections for individuals who oppose any practice, institute a legal proceeding, or testify in a proceeding concerning an individual’s status (as an employee or non-employee) for purposes of the FLSA or federal employment taxes.

New state enforcement mandates
The Acts would effectively require all states' laws to:

  1. provide for auditing and investigating employers that have not registered with the state, or are paying unreported wages, that have the effect of excluding employees from unemployment compensation coverage, and reporting to the DOL on a quarterly basis on the results of such procedures; and
  2. impose penalties for misclassifying employees or paying unreported wages to employees without proper recordkeeping.

Changes at the U.S. Department of Labor
The Department of Labor would be required to develop a new webpage containing specified information that educates workers about their rights under the FLSA and highlights the disparity of rights accorded employees versus independent contractors under the FLSA and state and local laws, and such other information as the Department deems appropriate. 

The bill would require the Department internally to share information concerning worker misclassification with its Wage and Hour Division, and permit the Division to share such information with the IRS. Finally, the bill would require FLSA audits conducted by the Division to include certain industries "with frequent incidence of misclassifying employees as non-employees," as determined by the Department.

MRA's concerns and position
The Employee Misclassification Prevention Act and the Payroll Fraud Prevention Act would have a dramatic chilling effect on independent contractors and their clients in the research profession, as it would significantly increase the regulatory risk and administrative burden of doing business with independent contractors. The bills effectively constitute regulatory intimidation by threatening firms with draconian financial penalties and burdensome administrative duties if they choose to do business with sole proprietors.

Legitimate independent contractors would be severely harmed by the bill, because it would place them at a material disadvantage relative to their larger competitors.  Potential clients could avoid these new administrative burdens and financial risks by simply choosing to do business only with such larger competitors.

MRA is opposed to H.R. 3178 and S. 770, and the inclusion of their provisions in any final product from the Joint Select Committee on Deficit Reduction.

We also joined with our coalition allies in a letter to the Joint Select Committee on the topic.