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: For purposes of Unemployment Insurance, employers are required to pay unemployment insurance for their
employees. 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 an exempt person (an individual who operates their own business and does not have any employees other than their family members) 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.
For examples of the application of this test to the construction and landscaping industries see
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,
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:
- The name, address, occupation, and classification of each employee or independent contractor;
- The rate of pay for each employee or method of payment for each independent contractor;
- The amount paid each pay period to each employee or independent contractor;
- For each independent contractor or exempt person hired, the regulations further require that the employer
keep at the work site or place of business:
- A description of the employer's business or a contract between the employer and the independent
contractor or exempt person;
- Forms signed by the independent contractor of exempt person acknowledging that they received notice of
their classification; and
- 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
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
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
firstname.lastname@example.org, or call 410-767-9885 and for
questions relating to Unemployment Insurance, you can contact the unemployment insurance division by e-mail
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