By Patricia Heyen

The North Carolina Employee Fair Classification Act (EFCA), which will take effect on December 31, provides a mechanism that allows workers to more easily report—and state agencies to more easily prosecute—employers that misclassify workers as independent contractors instead of employees.

The new law increases the potential impact of worker misclassification, including higher legal expenses and other costs. Worker misclassification remains a hot topic for employers and a priority for federal and state agencies. Workers who are classified as employees are provided certain protections under the law regarding issues like minimum wage, overtime pay, benefits, equal employment opportunities, and on-the-job injuries. Those protections don’t apply if a worker is an independent contractor.

In addition, employers must pay certain state and federal taxes for employees but not for contractors. Over the last 10 years, state and federal agencies have become much more aggressive in investigating worker misclassification and seeking to recover unpaid taxes and wages.

The EFCA establishes 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. 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 new law doesn’t change the definitions of “employee” or “independent contractor” under state law. It simply provides an enforcement mechanism for the current law. 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.

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.

Additionally, licensure applicants before state licensing boards must certify that they have read and understand the ECS public notice statement defining employee misclassification and disclose any investigations into misclassification, including the outcome of the investigations. Applicants that fail to comply with those requirements will have their license, permit, or certification application denied.

The EFCA applies to the misclassification of workers under multiple areas, including wage and hour law, workers’ compensation law, and tax law. Because different tests for determining employee and independent contractor status are applied under different areas of the law, a worker’s correct classification depends on the legal context. The analysis is always a case-by-case determination and typically turns on control—i.e., whether the worker is truly an independent agent who controls her own work (an independent contractor) or whether the worker’s service is controlled and directed by the employer (an employee).

For more information on the new North Carolina law, see the October issue of North Carolina Employment Law Letter.

Patricia Heyen is an attorney with Womble Bond Dickinson (US) LLP in Winston-Salem, North Carolina. She can be reached at patricia.heyen@wbd-us.com.