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Workplace Fraud Act of 2009

Workplace Fraud Act of 2009

On May 7, 2009, Governor Martin O’Malley signed the Workplace Fraud Act of 2009 (the “Act”), which went into effect on October 1, 2009.  This Act empowers the State of Maryland to impose penalties, in addition to those already permitted under the Fair Labor Standards Act, Maryland Wage and Hour Law, and the Maryland Wage Payment and Collection Act, on employers who violate the law in an effort to drastically reduce the number employees who are misclassified as independent contractors.  The new Act currently applies only to the construction and landscaping industries, as these industries routinely incorrectly classify employees.  

Under the Act any work performed by an individual for remuneration is presumed to create an employee-employer relationship, unless certain exception criteria is met.  There are two ways that the employee presumption can be rebutted, the person must either fit the statutory definition of exempt or the employer must demonstrate that the individual meets three specific criteria.  The criteria the employer must show are that  1) the individual is free from direction and control of the person for which the work is being performed; 2) the individual is customarily engaged in an independent business which is of the same nature as the work to be performed; and 3) the work is outside the normal course of business of the entity or person for which the work is done or it is performed outside any place of business of the person for which the work is done.  These factors are some of the same factors that the DLLR uses to assess whether a person is an independent contractor for the purposes of workers compensation premiums and unemployment insurance premiums.

To determine if an individual meets the second exception and is defined as an exempt employee under this Act the DLLR will review evidence of whether the person: 1) performs the services for which they are paid themselves and employs no other individuals, other than family members;  2) whether the person performs services free and clear of all direction and control of the entity or person providing payments; 3 ) whether the person provides his or her own tools and equipment;  4) whether the person operates a business that is inseparable from the individual for tax, profit and liability purposes;  5) whether the person exercises complete control  over the management and operations of the business; and 6) whether the person performs or has the right to perform similar services for other individuals or entities.

If an employer fails to prove that an individual meets one of these two exemptions the DLLR will begin imposing greater fines and penalties on companies.  These fines and penalties will increase each time an employer fails to properly classify

 its employees.  Employers who unknowingly misclassify employees may be subject to civil penalties of up to $1,000 per improperly classified employee.   Employers who knowingly misclassify employees can be subject to civil penalties of up to $5,000 for each employee who is improperly classified for the first offense, penalties of up to $10,000 per employee on the second offense, and penalties of up to $20,000 per employee on the third offense.  An employer may also be subject to an additional award of damages against it in an amount equal to three times the economic damages that a court finds due are to an employee.  This is in additional to damages permitted under other Maryland labor statutes and the Fair Labor Standards Act.

While the current Act applies only to the construction and landscaping industries, the Governor has issued an executive order creating a task force to target employers and industries which routinely mis-categorize employees.  Therefore, all employers should review their policies regarding independent contractors to verify that their independent contractors are not mis-classified as other industries will likely be added to the Act in the future.

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