Employee or Contractor? North Carolina Cracks Down on Employee Misclassification


Employee misclassification is the practice of misclassifying an employee as an independent contractor to avoid tax liabilities and other obligations.  The recently released 2020 Annual Report from the North Carolina Industrial Commission shows that the Employee Classification Section of the Commission processed 5,129 employee misclassification reports/alerts this past year, resulting in over $6 million in penalty assessments against employers.  As a result of the passage of the North Carolina’s Employee Fair Classification Act in 2017 (the “EFCA”), the Employee Classification Section was permanently created and is tasked with sharing information of employee misclassification with other North Carolina agencies. 

How Can the Employee Classification Section Affect Employers?

This information sharing results in expanding the potential liability, taxes and penalties for employers that are discovered engaging in employee misclassification.  Before the Employee Classification Section was created, there was no formal mechanism for sharing information among these agencies and a complaint to or finding of misclassification by one agency was unlikely to result in an investigation or penalty by another agency.

As a result of the EFCA, employers can expect a continued focus on penalties being assessed by multiple North Carolina agencies for employee misclassification issues.  Audits performed by the NC Division of Employment Security resulted in the discovery of 8,354 workers that were misclassified this past year, resulting in over $1 million in taxes being assessed.  Similarly, the NC Department of Labor assessed additional penalties against employers for unpaid wages due to the misclassification of their employees.  The NC Department of Revenue audited taxpayers and assessed over $14 million in additional tax, penalties and interest  as a result of their efforts to identify employers engaged in employee misclassification.

What are the potential penalties or impact to an Employer for Employee misclassification?

Employers may have to pay back taxes for each misclassified worker for up to five years before the date a misclassification determination is made. In other instances, state and federal wage and hour laws allow misclassified employees to file private lawsuits to recover up to double the amount of any unpaid overtime or lost wages that result from misclassification along with their attorneys’ fees.

How do I determine if A WORKER should be classified as an Employee or Contractor?

The following factors are generally considered by all agencies in determining whether a worker is misclassified:

  • What is the nature of the work being performed by the worker? Is it more consistent with work that would be performed by an employee or an independent contractor?
  • Does the company provide direction on how to complete work tasks or is the worker free to choose their method of performing these tasks? The less autonomy a worker has in deciding how to perform the work, the more likely they are an employee rather than an independent contractor.
  • Is the worker free to use assistants to perform tasks and do they have full control over their assistants? Can they hire and fire them without approval? If yes, then this indicates more of an independent contractor relationship.
  • Does the company provide equipment for workers to use to complete tasks? Independent contractors should supply their own tools and equipment for use when performing their work, while employees almost always use tools and equipment provided by their employer.
  • What kind of documentation is there between the worker and the company relating to the tasks or services the worker is performing? If there is an employment contract in place containing non-compete provisions or other restrictive covenants? If so, then this is more of an employment relationship. Is there an independent contractor agreement that permits the worker to perform the same work for other organizations? If so, then this is more of an independent contractor relationship.

Recently, the U.S. Department of Labor proposed a rule change that would further clarify whether workers are employees or are independent contractors under the federal Fair Labor Standards Act, but this rule has not yet gone into effect.

What if I really can’t determine if a worker should be an employee or independent contractor?

If it’s a close question about which side of the line a worker falls on, classifying the worker as an employee rather than as an independent contractor will result in no penalties, back taxes, back pay, or interest. Erring in the other direction, however, may expose the company, and sometimes individual decision-makers within it, to significant liability.

The Business Law attorneys at Skufca Law are experienced in responding to employee misclassification complaints and reviewing and drafting independent contractor and employment agreements that protect employers. To schedule a consultation focused on answering your questions about employee misclassification, contact the business law attorneys at Skufca Law at (704) 376-3030.