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How to Prepare for a New York Department of Labor Audit

Are you prepared for a Department of Labor Audit or Investigation? Why you need to know the definition of an Independent Contractor Now and more employers are being kept up at night because of risks associated with misclassifying their workers as independent contractors instead of employees. In the past, misclassification was not a significant area of litigation or administrative enforcement; however those days are over. Employers must take proactive steps to ensure they are in compliance and have implemented best practices before a lawsuit or Department of Labor audit is commenced. A pressing concern for employers is the lack of intent required in these cases. A well-meaning employer can find itself facing serious legal exposure even if the workers do not complain. For example, even if a company and a worker agree that he or she is a contractor and they sign an agreement to that effect – that is not sufficient. The courts or administrative agency will do a fact specific investigation and determine the worker’s proper status. This is an issue companies need to get in front of now.

Increased Enforcement Efforts by the Department of Labor

Chart.Increase.DOL.Audits.Dollar.Photo.Club.1.18.16.jpgFederal and state agencies (New York and US Department of Labor) have both stated that one of their primary enforcements efforts is misclassification cases. In fact, Thomas Perez of the US DOL views independent contractor misclassification cases as “workplace fraud” and believes that they are a “pervasive practice that cheats the state out of revenue, creates an unequal playing field… and deprives workers of their basic rights.” The federal agency has increased its budget to $14 million dollars to combat worker misclassification; this is a continuation of a five-year initiative it started in 2010. The agency has been successful in its efforts and recovered over $200 million dollars. The US DOL now has more than 2,000 investigators and works state agencies as part of joint task forces. There have been many high profile settlements and recoveries including cases involving Lowe’s, Sleepy’s, Rick’s Cabaret, and the San Diego Tribune.

Can I be Sued by an Independent Contractor for Misclassification?

Freelancer.Image.Dollar.Photo.Club.3.9.15.jpgYes. More and more workers are bringing lawsuits and administrative claims for misclassification cases. An employee lawsuit is a second legal hurdle that companies have to navigate in addition to Department of Labor audits. In these cases, a worker alleges that he or she was misclassified as an independent contractor instead of an employee. The worker may seek the following remedies, among others: (i) unpaid overtime pay; and (ii) value of employee benefits – this can be substantial depending on how benefit rich your workplace is. A worker can seek the value of vacation pay, medical expenses and other health care costs (if your company provided health insurance to employees), and participation in employee benefit plans like stock option plans and profit sharing plans. This last part is where it can become very expensive for companies. Microsoft found out this the hard way in the 1990’s in its own misclassification case. (iii) reimbursement of other expenses; (iv) back taxes, penalties and interest and attorney’s fees. A misclassification case can lead to tax nightmare and may require the amending and re-filing tax returns and related documents.

Workers have brought claims under multiple theories and some include: (i) fraud (ii) unjust enrichment (iii) misrepresentation. A worker can also file an SS-8 form and request that the IRS make a determination as to his or her worker status. Most companies do not find this ideal and are not happy to hear that the IRS is investigating their practices (proper or otherwise).

Tips and Pointers

Best.Practice.Light.Bulb.DOL.Audit.Dollar.Photo.1.18.16.jpgThe legal issues on misclassification cases can be complicated. We have discussed the differences between an employee and contractor before. You should seek counsel from an experienced employment law attorney to learn your workers’ proper status, your best practices, your potential exposure and defenses. Below are some general tips and pointers for companies to consider (note: do not implement these without seeking counsel on your specific situation first):

ONE: Companies should not engage with individuals who personally perform services integral to their business. It is advisable to have signed written agreements with legal entities that perform the services required – as opposed to having a undefined relationship with an individual worker who does work integral to your business model (e.g., security guard in a security service).

TWO: Do not use a sample independent contractor contract you find online or are given by a friend. You should have an experienced employment law attorney review any agreement and make appropriate recommendations under the circumstances. This agreement is different than an employment agreement and its content should vary based on the circumstances. This one area where the maxim – one size does not fit all – is true.

THREE: Ideally, companies should pay independent contractors pursuant to a written invoice, not by the hour or on a salary basis (which are typically bases to pay employees).

FOUR: Companies should not provide contractors with company business cards, uniforms or training. These are typically provided to employees.

FIVE: Companies should conduct self-audits to determine their exposure so they can make appropriate adjustments.

These cases can have several moving parts and can lead to cases in different forums. With that in mind, it is important to get legal counsel from the outset. An audit is a serious legal proceeding. Contact our Award Winning Department of Labor Attorney at (800) 893-9645 to get help and protect your business. We have represented other businesses in misclassification matters.


Disclaimer: Thank you for visiting our Blog. This blog provides general information and thoughts about various employment law issues primarily in the New York Tri-State area and occasionally in other areas. You are welcome to read the posts. However, do not construe any content on this blog as legal advice or the creation of an attorney-client relationship. Again, we provide the content only for informational purposes. You should not make decisions based information on our blog since the application of the law depends on the facts and each situation may be different. In addition, the law in most jurisdictions is different and changes constantly and we make no representations that any information on our blog has been updated. The Blog should not be used as a substitute for competent legal advice from an experienced attorney in your state or jurisdiction. From time to time, a blog post may discuss a legal case – please note that the post may not contain the most to update information on the case as developments may have occurred after it was created.

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