Managing Misclassification: What You Should Know About the Employee Fair Classification Act

By Rachel Hairr

The Employee Fair Classification Act (EFCA), adopted by the North Carolina General Assembly in August, goes into effect on December 31, 2017. Here’s what employers and employees need to know.

The EFCA’s Purpose

The EFCA was enacted to address the practice of misclassifying employees as “independent contractors,” an issue which gained state-wide, and later national, attention in 2014. By classifying workers as independent contractors, employers can avoid paying state and federal payroll taxes, unemployment taxes, and providing worker’s compensation insurance, which would be legally required if the worker were classified as an employee. The practice of misclassification is particularly rampant in such industries as the construction industry.

To help combat the practice of misclassification, the EFCA authorizes the establishment of the Employee Classification Section (ECS), which will receive and investigate complaints, and report suspected misclassification to the following agencies: the North Carolina Department of Labor; the Division of Employment Security within the Department of Commerce; the North Carolina Department of Revenue; the North Carolina Industrial Commission; and, the U.S. Department of Labor. The ECS creates a mandatory mechanism for information-sharing among the various agencies which previously did not exist.

In effect, the EFCA will make it easier for workers to understand their rights and make complaints when they believe they have been misclassified, and for various agencies to investigate and recover fees, penalties, back taxes, and owed wages or benefits from employers who they determine have avoided payment by misclassifying workers.

Who Is Affected By EFCA?

The EFCA is primarily committed to combatting actions by employers. An “employer” is defined by the EFCA as an individual or entity that employs one or more employees. The EFCA does not provide a singular definition of employee, as each agency applies its own definition.      

Requirements Under the EFCA

• The EFCA creates a public notice requirement, under which all North Carolina employers will be required to inform employees of their rights under the Act. The notice must include the following:

1. The definition of the terms “employee” and “employee misclassification,” which rely on the definitions contained within Chapter 95 (state wage and hour laws), Chapter 96 (unemployment benefits), Chapter 97 (workers’ compensation benefits), Chapter 105 (revenue and taxes), and Chapter 143 (occupational licensing). Employers will need to know the various definitions pertaining to each individual chapter in order to ensure that a worker has not been misclassified as an independent contractor.
2. Inform workers that they may report suspected misclassification to the ECS.
3. Provide the physical location, mailing address, email address, and telephone number where reports of alleged employment misclassification can be made to the ECS.

• The EFCA mandates that every state occupational licensing board require each applicant to certify that he has read and understands the public notice requirements contained within the Act, and disclose all employment misclassification investigations for a period of time determined by the licensing board. If the applicant does not comply with these requirements, the licensing board must deny the application.

Employer Actions

In order to comply with the public notice requirement created under the EFCA, employers will be obligated to display a poster which includes all of the necessary information in plain language. Once this requirement goes into effect, there will be an increase in information accessible to employees about what constitutes misclassification and how to report it. As such, employers should be encouraged to evaluate all workers classified as independent contractors before that time, especially if they are subject to a state licensing board. For assistance in determining if a worker is an independent contractor or employee, employers can look to IRS guidelines.