Jennifer M. Granholm Andrew S. Levin Governor DELEG Acting Director and Task Force Chair

1. Jennifer M. GranholmAndrew S. Levin Governor DELEG Acting Director and Task Force Chair

2. Executive Order 2008-1 Interagency Task Force on Employee Misclassification • Employers sometimes misclassify their workers as “independent contractors,” when those individuals are really “employees” • Misclassification allows the employer to avoid legal obligations • Governor Jennifer Granholm created the Interagency Task Force on Employee Misclassification, to coordinate enforcement across state departments

3. Interagency Task Force on Employee Misclassification Task Force Chair: Andrew S. Levin, Acting Director, Department of Labor & Economic Growth Task Force Members: Susan Agee, Administrator, Tax Compliance Bureau, Department of Treasury Jack Finn, Administrator, Wage & Hour Division Stephen Geskey, Director, Unemployment Insurance Agency Jack Nolish, Director, Workers’ Compensation Agency Sergio Paneque, Director, Business Services Administration, Department of Technology, Management & Budget

4. Overview of Governor Granholm’s Chargeto The Task Force • Examine and evaluate existing employee misclassification enforcement and recommend changes • Create a system for sharing information about suspected employee misclassification violations among Task Force member agencies and other states • Recommend executive or legislative actions needed to aid in information sharing

5. Overview of Governor Granholm’s Chargeto The Task Force • 4. Cooperative efforts • Form interagency enforcement teams to investigate significant cases of employee misclassification • Work cooperatively with law enforcement agencies, including the Internal Revenue Service, and • Establish a procedure for referring cases to the Attorney General or law enforcement authorities • 5. Develop educational programs and information sharing with business, labor, community and faith-based groups

6. Overview of Governor Granholm’s Chargeto The Task Force • Educate the public about employee misclassification and the harm it inflicts • Develop procedures to streamline identification and reporting of employee misclassification • Establish a referral and tip system for the public, such as a telephone tip line and a website • Issue a report to the Governor each July 1

7. Task Force Committees • Education / Communication Educating the public on the employee misclassification issue and maintaining the website. • Research Researching experiences of misclassification in other states and their responses. • Legal • Reviewing the various Michigan laws defining “employees” and recommending possible changes to coordinate the state’s laws and rules. • Examining the legal issue of sharing confidential information between agencies.

8. What Is Employee Misclassification? • Misclassification most commonly occurs when an employer improperly (or maybe innocently) classifies a worker as an “independent contractor,” rather than as an “employee” • The primary difference between an independent contractor and an employee is the employer’s “right to control” the worker. With an employee, the employer: • Directs the worker • Determines what needs to be done (results) and • Controls how it is to be done (means).

9. Why Is Employee Misclassification Harmful? • Workers who are misclassified, may: • Be ineligible for such payments as unemployment insurance and workers’ compensation • Lose other labor law protections, such as minimum and prevailing wage, overtime, health and safety, and family and medical leave • Become liable for funding their full Social Security and Medicare taxes and for reporting their own income taxes • Lose access to employer-based benefits, such as health insurance

10. Why Is Employee Misclassification Harmful? • Employers who misclassify their workers: • Avoid paying income taxes, FICA taxes, unemployment taxes and workers’ compensation premiums on workers not classified as employees • Create an unfair competitive advantage • Underbid employers who do not misclassify their employees • Cause employers who “play by the rules” to pay higher unemployment taxes as less taxes go into the unemployment insurancetrust fund

11. Why Is Employee Misclassification Harmful? • Taxpayers lose because: • Less unemployment taxes are collected • to pay unemployment benefits, as taxable • wages are underreported • The social safety net is harmed. GAO estimates • that in 2006, $2.72 billion was underpaid nationally • in Social Security taxes, UI taxes and income taxes. A recent study found that 10% of New York’s workers were misclassified

12. Task Force Conclusions • Misclassification of workers as independent contractors when they should be considered employees is an epidemic problem throughout the country and here in Michigan.. • In Michigan, there is no single definition of employee or independent contractor that is commonly used throughout the various statutory, regulatory and court decisions applicable to the agencies. • Although particularly prevalent in the construction/remodeling/repair industry, misclassification also occurs in other businesses including trucking (over the road and local delivery), security services and salons.

13. Task Force Conclusions • As the economic crisis continues, misclassification is more likely to occur as workers seek any available means of earning a living and employers seek to cut costs wherever possible. • The agencies participating in the Task Force each have enforcement divisions to deal with misclassification issues, however: • There are statutory barriers to inter-agency commu-nication due to existing privacy laws and regulations. • There are no established inter-agency communications channels. • There is no centralized “clearing house” for handling complaints about misclassification issues and for following up to monitor and coordinate enforcement efforts.

14. Economic Reality Test Each state agency has its own test to determine if a worker is an independent contractor. The following questions are typical of those considered in classifying a worker: • Does the employer incur liability if the relationship terminates at will? • Is work performed an integral part of the employer’s business? • Does the worker depend upon the wages from that job for their living? • Does the worker furnish equipment and materials? • Does the worker hold himself or herself out to the public as able to perform the same tasks? • Is the work customarily done by an independent contractor? • Does the employer have “control” through the payment of wages, maintenance of discipline and the right to hire and fire the worker?

15. Task Force Recommendations • The Task Force recommends that certain steps be taken to address the employee misclassification issue: • Legislation should be introduced along the lines of that proposed in Pennsylvania that clearly identifies misclassification of employees in the construction and commercial carriers industries as conduct subject to civil and criminal sanction. In the future, Michigan should consider expanding coverage beyond these two industries. • Legislation should be introduced to protect individuals making complaints regarding employee misclassification. • Legislation should be introduced requiring that all employment-oriented training programs at the high school and post-high school levels in Michigan require mandatory training on employee rights and responsibilities.

16. Task Force Recommendations • Create training courses and related materials. • Introduce legislation removing any statutory or regulatory barriers to cross agency communication on misclassification efforts. • Create and implement Memoranda of Understanding between the involved agencies facilitating information exchange. • Create a central clearing house to: • Receive complaints or inquiries regarding employee misclassification from all communication sources. • Direct complaints to various state agencies that have appropriate subject jurisdiction. • Co-ordinate efforts by various agencies to investigate and pursue violations of employee classification. • Monitor the progress of investigations and make information public where appropriate.

17. Michigan House Bill 5962An amendment to the Workers’ Compensation Act of 1969 Contractors classified as employees.  Under the bill, in the case of principals and contractors in the commercial carrier and construction industries, a contractor is considered to be classified as an employee of the principal, and must be treated as an employee under the act, unless the principal demonstrates the following to the satisfaction of the director of the Worker's Compensation Agency:  • The contractor, encompassing all provisions of Section 161(1)(n), is not an employee; and • The contractor has been and will continue to be free from direction and control of the principal, both in fact and under the contract, express or implied, between the parties.

18. HB 5962 Penalties.  The bill specifies that a principal who failed to properly classify an individual as an employee, and that failed to pay benefits or other contributions required by the act, would be guilty of the following:  • for knowingly violating this subsection, a felony punishable by imprisonment for not more than 18 months or a fine of not more than $15,000, or both, for a first offense, and imprisonment for not more than seven years or a fine of not more than $30,000, or both, for a second or subsequent offense; • for unintentionally violating this subsection, a misdemeanor punishable by imprisonment for not more than six months or a fine of not more than $2,5000, or both, for a first offense, and imprisonment for not more than one year or a fine of not more than $5,000, or both, for a second or subsequent offense.

19. Federal Employee Misclassification Legislation There are two bills before Congress that target employee misclassification: • Employee Misclassification Protection Act (EMPA) • Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) S. 2882 and the companion bill in the House closely resemble bills that were introduced in the last Congress.  Since the previous introduction of the legislation, a labor-friendly president has entered office and has made clear his intent to enforce the nation’s laws governing the fair payment of wages. In addition, a cash-strapped government is ever more feeling the pinch of lost employment-tax revenue attributable to the classification of workers as independent contractors.  Congress, therefore, has enhanced incentives for pursuing this type of legislation.

20. Employee Misclassification Protection Act (EMPA) • Was introduced by Senator Sherrod Brown (D-Ohio) on April 22, 2010, and would amend the Fair Labor Standards Act and the Social Security Act. The bill would: • Prevent and penalize employers from misclassifying workers as independent contractors and would provide protections as well as the benefits they would have earned.  • Require employers to provide written notice to workers identified as independent contractors. The notice would include: (1) worker’s classification; (2) the U.S. Department of Labor (USDOL) website that provides additional information about employees’ rights; (3) address and telephone of the local USDOL office; and (4) any additional information as required.

21. Employee Misclassification Protection Act (EMPA) • Ensure that employers keep accurate records classifying each worker accordingly and increase penalties for non-compliance.  It would also provide protections to workers who are discriminated against for asking to be accurately classified.  For any infraction, employers could be fined up to $1,100 per day per employee, up to $5,000 per employee per day for repeated violations, and liquidated damages. • Enhance state and federal efforts to combat misclassification by mandating USDOL-monitored state audits, increasing state penalties, providing a mechanism for the USDOL and Internal Revenue Service to refer incidents between each other, and directing the USDOL to perform audits on “frequent offender” industries.

22. Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) • Was introduced by Senator John Kerry (D-Mass.) on December 15, 2009. The bill aims to reduce the misclassification of workers as independent contractors and is a companion bill to a measure introduced in the House of Representatives in August 2009 (H.R. 3408). • The bill would amend Section 530 of the Revenue Act of 1978 – the so-called “safe harbor” provision that gives businesses flexibility in classifying workers as independent contractors for employment-tax purposes. • Generally, in determining a worker’s status as an employee or an independent contractor, the IRS applies the common-law test, which focuses on 20 factors regarding the relationship between a business and a worker.  Section 530 allows businesses to classify workers as independent contractors, regardless of the common law analysis, unless the business has no “reasonable basis” for such a classification.  • The “safe harbor” provision allows employers to use an industry practice of classifying workers in a particular position as their “reasonable basis” for the classification.  The proposed legislation would substantially reduce the scope of the “safe harbor” provision.

23. Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) Under the proposed legislation, a business would have a “reasonable basis” for treating a worker as an independent contractor only if the business or its predecessor met the following two-factor test:  • The employer could not have treated any worker holding a substantially similar position as an employee since December 31, 1977, and • The independent contractor classification must be based in reasonable reliance on either: • A written determination from the Department of Treasury that the worker (or someone holding a substantially similar position) was not an employee; or • An IRS examination of the worker (or someone holding a substantially similar position) that did not conclude the worker was an employee

24. Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) To strengthen enforcement efforts, the bill would • Require businesses to issue Form 1099s to every service provider (whether an individual, a partnership or a corporation) to whom the businesses pay more than $600 annually and • Give workers classified as independent contractors the right to seek a determination of their status for employment-tax purposes from the Secretary of the Treasury.

25. Contact Information Project coordinator: Ms. Joyce K. Surprenant Project Coordinator – Employee Misclassification Unemployment Insurance Agency 3024 W. Grand Blvd., Suite 12-300 Detroit, Michigan  48202 For more information about employee misclassification and to read the Task Force Report to the Governor, visit our website: www.michigan.gov/deleg  To report suspected employee misclassification, call our toll-free hotline: 1-800-822-1122