Misclassification of employees is a national problem that affects benefit programs and state systems other than workers' compensation, including unemployment systems, disability systems and tax/revenue systems.
Employers that engage in misclassification schemes are unfortunately rewarded to do so because the savings are tremendous and provide a huge competitive advantage, and generally have no other consequence because enforcement is so difficult ... until either the worker becomes dissatisfied and seeks redress, or a work injury occurs.
In Minnesota an appellate court bored down through the facts to find that a worker who was encouraged to form her own limited liability company (LLC) in order to retain work was in fact still an employee entitled to the benefits and protections of employment status.
Rowan v. Dream It, No. A11-1135, Heather Rowan was a painter for Dream It, a licensed general contractor, for more than four years.
According to the court opinion, Rowan alleged that in November 2010 her supervisor, Jim Herman, had told her if she formed her own company and came back to work for Dream It as an independent contractor, her pay would be calculated by the square footage of the areas she painted rather than by the hours she spent working, which would make up for the wages she was losing due to her reduced hours.
Rowan formed her own LLC continued to come in to work each day and perform the same work she had done as an Dream It employee for the next four weeks.
On Dec. 9, 2010, Rowan refused a job offered by Dream It because she thought the square footage and payment amount were improperly calculated. Dream It did not offer her any other work after this, and Rowan applied for unemployment benefits.
The original unemployment hearing officer found Rowan to be an employee. On reconsideration the decision was reversed.
On appeal the court sided with the original finding of an employment relationship.
The court noted that the "idea to have Rowan quit her employment and form an LLC originated with, and was suggested by, Dream It," but "at no time was she advised of the negative consequences she would suffer in giving up her position with the company."
By quitting and forming her company, the opinion states, Rowan "simultaneously lost her status as an employee, any certainty in obtaining work," as well as the protections of the Fair Labor Standards Act, workers' compensation, and unemployment insurance.
The appellate opinion concluded that a reasonable worker in Rowan's position would have acted as she did, and so she was entitled to receive unemployment benefits.
The court was obviously mindful of the growing problem with employee misclassification, citing in its opinion a May 2011 report by the legislative Advisory Task Force on Employee Misclassification.
Indeed, an August 2011 newsletter from the Minnesota Department of Labor and Industry reported a 441% increase in the number of penalties issued to employers for workers’ compensation mandatory coverage enforcement actions in the last fiscal year. The number of penalties jumped from 210 in 2007 to 1,137 in 2011, yielding payments of $1,684,982.
While I don't know whether this increase is due to heightened enforcement action or due to an increase in misclassification activity, it is an alarming number regardless.
On the line in misclassification cases are lost state revenues for services and programs related to employment activity and in these times of governmental austerity increased enforcement to enhance general fund revenues is a sure bet, regardless of which state a business is in.
Those interviewed for the WorkCompCentral story, regardless of whether they represented labor or business, applauded the court's decision for upholding the rule of law, citing the increased costs and burdens placed on society by employers not playing fair.
There will always be those who believe "it won't happen to me". Reminders by the courts, such as the Rowan case, are unfortunately necessary to a balanced competitive marketplace.