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North Carolina Misclassification Crackdown Takes Effect

The past year was a tough one when it comes to the issue of worker misclassification. For about a decade, there was some significant progress in state legislatures across the nation voting to crack down on the problem. It's an issue across industries and is particularly problematic in construction. With a few exceptions, 2017 did not see many new efforts to enforce the law. 

Worker misclassification, as Construction Citizen readers are aware, is also known as "payroll fraud" and happens when employers pretend their workers are “independent contractors” when, by law, they should be classified as employees and compensated as such. Of course, there are many legitimate uses for contract labor. 

The problem arises when employers intentionally use the designation of "contractor" to avoid payroll taxes and benefits, enabling those lawbreaking companies to underbid ethical firms. Everyone loses except the bad guys when those cheaters are awarded with work. The IRS has a test for determining which of your workers is an employee vs a contractor, which you can see here.

In North Carolina, the legislature voted last year to move forward with what lawmakers described as a “significant” crackdown on misclassification. The state’s new law, the North Carolina Employee Fair Classification Act (EFCA), took effect at the end of 2017. 

The law is aimed at identifying "businesses that engage in activities of Employee Misclassification throughout the State of North Carolina and collaborate with State agencies to conduct independent investigations in order to determine if there has been violation of the respective agency operating statutes," per the state agency charged with enforcement. 

State Sen. Andy Wells, a Republican, said cheaters should be stopped. 

“It’s a fairly profitable thing to do, and it creates some problems in the market,” Sen. Wells said. “The businesses doing things the right way are completely out of luck. They’re at a competitive disadvantage. You could get to an extreme where the bad guys are the only ones in the market because they’ve driving out everyone else.”

Specifically, the law creates a new division of the North Carolina Industrial Commission called the Employee Classification Section (ECS). 

“The ECS will investigate reports of worker misclassification and assist other North Carolina agencies, including the Industrial Commission, the Department of Labor, and the Department of Revenue, in recovering money owed as a result of misclassification,” according to a website called Compensation.BLR.com. “The ECS also will assist state agencies and district attorneys’ offices in prosecuting employers that fail to pay penalties assessed as a result of worker misclassification.”

The law keeps the definitions in place for “employee” and “independent contractor” – in line with the IRS definitions – and provides an enforcement mechanism. "The practical effect of the EFCA is that a single misclassification complaint could trigger a full-fledged, multiprong investigation into an employer’s classification of all workers,” the Compensation website reported.

“Also, the new law requires employers to post a workplace notice informing workers that they should be classified as employees unless they are independent contractors and stating that workers who believe they have been incorrectly classified have the right to report potential misclassification to the ECS.”