Employee v. Independent Contractor Status and North Carolina’s New “Employee Classification” Law

One of the “hottest” topics in federal and state wage & hour law continues to be the proper classification of workers. In short, are they “employees” subject to W-2 withholdings, company-provided benefits and state workers’ compensation laws, or are they “independent contractors” paid under an IRS Form 1099 without withholdings, benefits or workers’ comp coverage from the company?

On August 11, Gov. Roy Cooper signed into law the North Carolina Employee Fair Classification Act, N.C. Gen. Stat. § 143-761 et seq., which beginning December 31 takes our state further down the path of determining this key classification issue. Although the new legislation does not change existing definitions of “employee” and “independent contractor”, it does create an Employee Classification Section of the North Carolina Industrial Commission which, among other duties, administers our state’s workers’ compensation law. This Section will be empowered to receive and investigate reports of worker misclassification, and to provide for information sharing among various state agencies, including the Department of Labor, the Division of Employment Security, the Department of Revenue, and the Industrial Commission.

In short, the law provides a mechanism for workers to make complaints and may make it easier for affected state agencies to pursue employers who misclassify their workers. State licensing boards will be required to ask applicants to disclose investigations for employee misclassification and the outcome for a period of time to be determined. Failure to comply will result in denial of the license or permit.

Employers will be required to post a notice that includes the following information:

* That workers must be treated as employees unless they are independent contractors.
* That workers who believe they have been misclassified have the right to report the alleged misclassification to the Employee Classification Section.
* The physical and email addresses and telephone number where alleged misclassifications can be reported.

The classification provisions apply to “employees” as defined in the North Carolina Wage and Hour Act, the Employment Security Act, the Workers’ Compensation Act, and Chapter 105 of the General Statutes (Taxation). Elsewhere, the legislation also authorizes the Industrial Commission to adopt guidelines for the use of opioids and pain management treatment for compensable workplace injuries and illnesses.

All of which brings us to a quick reminder of how our courts and the United States and North Carolina Departments of Labor generally determine whether an individual is an “employee” or an “independent contractor.” The issue reached new heights when the US DOL in July 2015 issued a new Guidance on the existing “economic realities” test for making that determination. To help the inquiry, the DOL established six primary factors, none of which alone are likely controlling but all of which should be considered:

1) Is the work an integral part of the employer’s business? [The less integral the better for independent contractor status.]

2) Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? [The more a worker manages his or her own business regarding profits and losses, the better for independent contractor status.]

3) How does the worker’s relative investment compare to the employer’s investment? [The smaller the worker’s investment the better for independent contractor status.]

4) Does the work performed require special skill & initiative? [The more special the skill & initiative, the better for independent contractor status.]

5) Is the relationship between the worker and the employer permanent or indefinite? [The more indefinite (and generally short-term), the better for independent contractor status.]

6) What is the nature and degree of the employer’s control? [The less control over the worker the better for independent contractor status.]

Notice that whether or not an individual has an independent contractor agreement isn’t even an itemized consideration. The reason is that while agreements like that can certainly help – and are generally recommended – the critical inquiry is how individuals are actually treated and conduct themselves in the workplace. In other words, the “economic realities” of the relationship, not what someone is called by agreement or otherwise.

Needless to say, the potential liabilities for employee misclassification can be tremendous, ranging from back payments for minimum wage obligations, overtime and benefits to FICA contributions and certain employer-employee tax requirements. All the more reason why every company should closely examine whether any worker engaged as an independent contractor satisfies the above six factors, taking appropriate corrective steps as needed.


This article was written by Kenneth P. Carlson, Jr. and Robin Shea of Constangy, Brooks, Smith & Prophete, LLP.