The MD Fraud Act of 2009, effective October 1, 2009, makes it a violation for an employer to misclassify workers as employees.  The new law specifically applies to employers in the construction and landscaping services industries from misclassifying workers as independent contractors rather than employees to avoid certain payroll and related benefit costs.

In addition to establishing standards for determining whether an employer-employee relationship exists, 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.

Under the Act, “work performed by an individual for remuneration” paid by any person that employs individuals in MD is presumed to create an employer-employee relationship, unlessthe employer can demonstrate an independent contractor relationship or the individual worker is an “exempt person” under the Act.  

There are several factors to consider when determining whether an employer-employee relationship exists.  More specifically, for an independent contractor status, the worker must be:

1. free from direction and control over the work’s performance
2. customarily is engaged in an independent business or occupation of the same nature as that involved in the work, and
3. performing outside of the employer’s place of business or outside the normal course of business of the employer.

The Act imposes financial penalties on employers who misclassify employees and the penalties are increased where an employer knowingly misclassifies employees. 

Employers in the construction and landscaping services industries should assess immediately whether they engage any workers as independent contractors.  If so, they need to determine whether these individuals are properly classified. 

Though employers in other industries are not subject to the Act, taking the time to review their classification of workers is a good idea as they may be subject to other laws that require proper classification of employees.  While the Commissioner's authority only applies to construction and landscaping businesses, all employers are covered under the law for unemployment insurance purposes. MD’s unemployment insurance 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.

View other news articles from July 2009