Category: Business & Tax

Are your workers properly classified?

Even though the Michigan Legislature is currently mired in the often months-long process of passing a budget, there is a package of mostly non-spending bills in the Michigan House of Representatives that businesses should be keeping an eye on. The multi-bill package (HB 4390 et seq.) would create one of the strictest standards for defining an independent contractor and provides for significant penalties for those employers that misclassify workers. The language providing the definition of independent contractor under the legislation is as follows:

“Independent contractor” means an individual who performs work for a payer for remuneration and to whom all of the following apply:

(i) The individual is free from control and direction of the payer in connection with the performance of the work, both under a contract and in fact.

(ii) The individual performs work that is outside the usual course of the payer’s business.

(iii) The individual is customarily engaged in an independently established trade, occupation, or business of the same work performed by the individual for the payer.

This language closely follows the test popularized in California (and found in twenty-some  other states to varying degrees), which has come to be called the ABC test. The test boils down to the following questions:

1. 1. 1. Is the worker free from the principal’s management in performing the work?
      2. Are the worker’s services outside the principal’s typical line of business?
      3. Is the worker established in the profession of providing the services?

For examples on California’s application of the test, click here.

As mentioned, in addition to the new, stringent definition for independent contractors in Michigan, the proposed legislation would also drastically increase the penalties for misclassifying a worker; with egregious or repeated offenses leading to years-long prison sentences. The fines for such violations would also be increased ten-fold. While workers would be encouraged to bring their own complaints of misclassification under the legislation (and obtain 3x the amount of wages and fringe benefits wrongfully withheld); the legislation also directs the Attorney General to establish an enforcement unit, complete with approximately 25 investigators. And whistleblowers could get up to 30% of the penalties collected through such enforcement.

To expand the public’s knowledge and compliance with the new regulations, the legislation sets forth new posting requirements, including a requirement that the Department of Treasury send to each 1099-MISC recipient a booklet explaining the factors considered in classifying a worker as an employee or an independent contractor. Furthermore, other bills would require employers to publish or make available to employees information regarding the compensation paid to other similarly situated employees.

Finally, included in the package of bills is a bill that would address the use of noncompete agreements in the State of Michigan. HB 4399 would amend the current statute to include additional restrictions on the types of employee contracts that could include non-compete provisions. Specifically, the bill would prohibit an employer from using an agreement that would “request or obtain” a non-compete from a “low-wage employee.” Low-wage employees would be defined as those earning less than $15.00 per hour. Additionally, HB 4399 includes new notice requirements for employers. The notices would include a posting requirement similar to those conspicuous postings required for current wage and hour regulations and employee safety. And employers would have to disclose the terms of the non-compete agreement before hiring to each applicant for the position with a written notice of the requirement for a noncompete agreement. A similar bill (SB 0143) has also been introduced in the Michigan State Senate.

While passage of all or some of these bills is not certain, now is a great time for businesses to consult with an experienced attorney to review their employment and independent contractor agreements and assess the classification of their workers.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Robert D. Burgee is an attorney at Fraser Trebilcock’s Lansing office with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. He can be reached at bburgee@fraserlawfirm.com, or at 517.377.0848.