DLLR's Division of Labor and Industry

 

Frequently Asked Questions for Employers - Worker Classification Protection

 

"Workplace fraud" is a serious problem involving employers in the construction (including all aspects of home improvement) or landscaping industries who fail to properly classify workers as "employees." This fraudulent practice denies workers critical workplace protections guaranteed to employees, allows unscrupulous employers to undercut competitors who play by the rules, and deprives taxpayers of critical dollars. If you think an employer is committing fraud by misclassifying its workers, it is important that you let us know. All allegations are taken seriously.

Q: What is Workplace Fraud?
A: Workplace Fraud occurs when an employer fails to properly classify a worker as an "employee," even when the worker legally should be classified as an "employee". Employers who misclassify workers in this way avoid paying payroll taxes, unemployment insurance taxes, and workers' compensation premiums. However, the practice is illegal, and puts competitors at a disadvantage because they have to cover the unpaid costs of those who cheat. It also deprives the State of general revenue in addition to critical revenue for the Unemployment Insurance Trust Fund and denies workers access to protections only guaranteed to employees.

Q: What industries does the Workplace Fraud law apply to?
A: Under the Workplace Fraud Act, the Commissioner of Labor and Industry has authority to address misclassification of individuals in the construction and landscaping industries.

Q: How can I be sure I am properly classifying my workers?
A: Federal and State tax and labor laws use different tests to determine if a worker is an employee or an independent contractor. The common factor under all of these tests is: how much direction and control does the employer have over the worker and the work performed? 
The Workplace Fraud Act adopts the ABC test, which has long been used in Maryland's Unemployment Insurance law, to determine whether a worker in the construction or landscaping industries is an employee or an independent contractor. The ABC test is a three pronged test, under which an employer-employee relationship is presumed unless the individual performing the work is either exempt or the employer demonstrates that:

    1. The individual is free from control and direction;
    2. The individual customarily is engaged in an independent business of the same nature; and
    3. The work is outside of the usual course of business of the employer or performed outside of any place of business of the employer.
      Work is "outside the usual course of business" if the individual: 1) performs the work off the employer's premises; 2) performs work that is not integrated into the employer's operation; or 3) performs work unrelated to the employer's business.

For examples of the application of this test to the construction and landscaping industries see COMAR 09.12.40.05 and 09.12.40.06.
For further information on other State and federal tests that may apply, see the Joint Enforcement Task Force on Workplace Fraud web page.

Q: What are my obligations when I hire independent contractors?
A: The Workplace Fraud Act requires employers in the construction and landscaping industries to give an individual classified as an independent contractor or an exempt person with whom they contract notice of their classification and an explanation of what that classification means. (An exempt person is an individual who operates their own business and does not have any employees other than their family members.) A copy of the notice, in English (Word document, 144KB, download Word viewer for free) and Spanish (Word document, 154KB, download Word viewer for free), on our website.

Employers in the landscaping and construction industries must also keep, for at least three years, records containing the following information:

  1. The name, address, occupation, and classification of each employee or independent contractor;
  2. The rate of pay for each employee or method of payment for each independent contractor;
  3. The amount paid each pay period to each employee or independent contractor;
  4. For each independent contractor or exempt person hired, the regulations further require that the employer keep at the work site or place of business:
      1. A description of the employer's business or a contract between the employer and the independent contractor or exempt person;
      2. Forms signed by the independent contractor of exempt person acknowledging that they received notice of their classification; and
      3. Copies of any licenses or registrations provided by an individual classified as an independent contractor or exempt person.

Q: How is the Workplace Fraud Act enforced?
A: The law gives the Commissioner of Labor and Industry the authority to investigate workplace fraud in the construction and landscaping industries, as workers in these industries are often classified incorrectly. The Commissioner may: 1) enter the employer's place of business (or worksite) for purposes of investigation; 2) require the production of records; 3) issue subpoenas for records and testimony; and 4) pursue judicial relief and the assessment of fines for an employer's failure to comply.

While the Commissioner's authority only applies to construction and landscaping businesses, all employers are covered under the law for unemployment insurance purposes. The State's unemployment insurance division investigates employee classification through both random and non-random audits and when a person claims unemployment insurance benefits but is not listed as a covered employee.

Q: What are the penalties for workplace fraud?
A: Under the Workplace Fraud Act, employers who have been found to have mistakenly or unknowingly classified an individual employee incorrectly have 45 days to come into compliance without a penalty. If an employer does nothing to comply in the required time period, a penalty of up to $1,000 per misclassified employee may be imposed.

Employers who "knowingly" misclassify employees, however, may be subject to a penalty of up to $5,000 per misclassified employee. An employer may be assessed up to double the $5,000 penalty if it has previously been found in violation by a final order of a court or administrative unit. An employer in violation three or more times may be assessed up to $20,000 per misclassified employee.

Q: If I mistakenly misclassify an employee as an independent contractor, will I be subject to penalties?
A: No. Misclassification that is not found to be "knowing" will not result in a penalty; however, the employer will be required to come into compliance.

Q: How is it determined if an employer has "knowingly failed" to properly classify an individual worker?
A. The Workplace Fraud Act defines "knowingly" as having actual knowledge, deliberate ignorance or reckless disregard for the truth. For further guidance on evidence of "knowing" violation see COMAR 09.40.12.04.

The Commissioner of Labor and Industry will also consider the following as evidence that the employer did not knowingly fail to properly classify a worker: whether the employer sought and obtained documentation showing either (1) an exempt person's reporting of business income and losses on his personal income tax returns; or (2) an independent contractor's withholding of payroll taxes and payment of unemployment insurance contributions and workers' compensation premiums on behalf of all individuals working for him. Additional factors that may be considered include: whether the employer provided written notice to individuals of their status or classification and all implications of that status or classification, whether the employer reports workers' income to the Internal Revenue Service, and whether the employer has received a determination from the Internal Revenue Service that the individual is an independent contractor.

Q: If I would like additional information, what should I do?
A: You can contact the Workplace Fraud Unit of the Division of Labor and Industry by e-mail at wcpu@dllr.state.md.us, or call 410-767-9885 and for questions relating to Unemployment Insurance, you can contact the unemployment insurance division by e-mail uifieldinvestigation@dllr.state.md.us, or call toll free 1-800-492-5524.

Worker Classification Protection Unit
Division of Labor and Industry

1100 North Eutaw Street, Room 607
Baltimore, Maryland  21201
Telephone:  (410)  767-9885
wcpu@dllr.state.md.us