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Q: What is Workplace Fraud?
A: Workplace Fraud occurs when an employer fails to properly classify workers as "employees," even when those workers legally should be classified as "employees". 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 general fund and the Unemployment Insurance Trust Fund of critical revenues, and denies workers access to protections only guaranteed to employees.
Q: How can I be sure I am properly classifying my workers?
A: Maryland uses the ABC test to determine whether a worker
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 a exempt
person or the employer demonstrates that:
- The individual is free from control and direction;
- The individual customarily is engaged in an independent business of the same nature; and
- 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.
Through the regulatory process prior to the new law taking effect, DLLR will provide illustrations and more guidance about how to determine whether a worker is an employee or an independent contractor to better assist employers in properly classifying their workers.
Q: How will the new law be enforced?
A: The law gives the Commissioner of Labor and Industry the authority to investigate workplace fraud in the construction and landscaping industries, as those are the industries where workers are most often wrongly classified. 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 (UI) purposes. The State's UI division investigates employee classification through both random and targeted audits and when a person claims UI benefits but is not listed as a covered employee.
Q: What are the penalties for workplace fraud?
A: Currently there are no penalties for misclassification. The new law will allow an employer who misclassifies an employee but does not do so knowingly to come into compliance within 45 days without 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 a violation is a "knowing" violation?
A. The new law defines knowingly as having actual knowledge, deliberate ignorance or reckless disregard for the truth. Investigators and auditors consider the following evidence when determining whether a violation is knowing:
Whether the employer sought, prior to hiring the employee, documentation showing: 1) a sole proprietor's reporting of business income and losses on his personal income tax returns; 2) an independent contractor's withholding of payroll taxes and payment of unemployment insurance contributions and worker's compensation premiums on behalf of all individuals working for him; and 3) the employer provided written notice to individuals of their status or classification and all implications of that status or classification.
Under the law, the State bears the burden of proving a knowing violation. The Commissioner will work to adopt regulations providing guidance regarding the evidence relevant to the determination of whether a misclassification was knowing.
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