Big Changes for Companies Working With Independent ContractorsAugust 11, 2023 – Articles
Dinsmore partner of counsel Frank Mamat contributes columns and analysis about labor and employment topics for the Small Business Association of Michigan's newsletter and website. In this edition, Frank and Dinsmore attorney Erik Bradberry write about legislation proposed in Michigan that would change what defines an independent contractor.
A new bill working its way through the Michigan House of Representatives seeks to drastically change the meaning of the term “independent contractor” and impose steep penalties on businesses that misclassify workers.
A New Definition of “Independent Contractor”
Countless Michigan companies, large and small, enlist the help of independent contractors to conduct business. Generally, an independent contractor is “one who, carrying on an independent business, contracts to do work without being subject to the right of control by the employer as to the method of work, but only as to the result to be accomplished.”
House Bill 4390 would change that definition considerably. Under the new bill, an independent contractor is “an individual who performs work” and to whom the following three conditions apply:
- The individual is free from control and direction of the payer in connection with the performance of the work, both under a contract and in fact.
- The individual performs work that is outside the usual course of the payer’s business.
- The individual is engaged in an independently established trade, occupation, or business of the same work performed by the individual for the payer.
The new definition mirrors the “ABC Test,” which was popularized in California and contains three requirements: (1) that the worker is free from the control and direction of the hiring entity, both under contract and in fact; (2) that the worker performs work that is outside the usual course of the hiring entity’s business; and (3) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Like the ABC Test in California, if all three conditions defining an “independent contractor” under House Bill 4390 are not met, a company’s “independent contractor” could actually be its “employee.”
Severe Consequences for Misclassification
House Bill 4390 would prohibit employers from classifying an employee as an independent contractor. If a company were accused of misclassifying an employee as an independent contractor, the company—not the worker—would have the burden of proving that it did not improperly classify, report, or treat the employee as an independent contractor.
Employers that fail to carry that burden may find themselves ordered to pay wages to the employee, along with fringe benefits, a penalty matching the wages and fringe benefits due to the employee, exemplary damages of up to three times the amount of wages and fringe benefits due to the employee, and attorney fees.
Additionally, employers found to have misclassified “employees” as “independent contractors” may find themselves ordered to pay a civil fine of up to $10,000.00. Employers found to have acted with an “intent to defraud” may even be charged with a misdemeanor, fined up to $1,000.00, and/or imprisoned for up to one year.
Takeaways for Small Businesses
As with any proposed legislation, whether HB 4390 will be enacted in its current form is difficult to predict. However, preparation is key to avoiding the pitfalls some businesses will experience if the bill becomes law.
This article serves as a general informational summary and does not constitute legal advice. Please contact the authors with any specific questions.