A little over a year ago we sent a very clear warning to our readers who are in any kind of manufacturing business that uses independent sub-contractors. We discussed how some New York State and Federal labor law regulators have begun to look for new ways to penalize manufacturers, as so-called “joint employers,” for their independent subcontractors’ labor law violations and other areas of exposure. That trend has grown and has acquired such momentum that many more parties are moving in to target the manufacturer.

The cost-saving advantages of getting work done by independent contractors, instead of by traditional employees, have been numerous, especially in tough economic times like these. The use of independent contractors can result in an employer’s avoidance of paying (at least directly) for sick time, vacation time, health-care insurance premiums, retirement benefits, overtime, employer Social Security and Medicare contributions, and for Worker’s Compensation, disability and unemployment insurance costs. Employees of an independent contractor also have no right to collective bargaining directly with the manufacturer.

Obviously, the above list of benefits is an equally staggering list of detriments to the employees doing the work, unless they are receiving those benefits from the subcontractor which is their direct employer. The regulators and unions, and the courts which have sustained them on this subject, explain and justify their increased scrutiny of subcontractor labor law violations by pointing to cases where the violating subcontractor is really the manufacturer “in disguise”, rather than a real arms-length arrangement between truly separate entities. In such cases, the courts have ignored the technical legal separation between the manufacturer and the subcontractor, and have held the manufacturer liable for the subcontractor’s violations.

In the field of government labor regulation and oversight, this subject is referred to as “employee misclassification”, i.e., failing to classify a worker as a direct employee, but rather, as an independent contractor or the employee of an independent contractor. Governments also have a huge stake in correcting such misclassifications, since it has been estimated that in a single year, the losses of tax and other government revenues due to such misclassifications have come to billions of dollars. The current Administration has expressed the belief that adding just $25 million dollars to the Department of Labor budget to pay for additional investigators and enforcement agents, could result in a $7 billion dollar increase in collected tax revenues.

With incentives like that, it is no surprise that in the first quarter of 2010 alone, the federal government initiated audits of 6,000 companies to uncover employee misclassifications. The State of New York’s Department of Taxation and Finance, together with the Department of Labor’s Workers’ Compensation Board (“WCB”) also have joined together to form a special multi-agency Joint Enforcement Task Force on Worker Misclassification, engaged in similar stepped-up enforcement efforts. The courts have also ruled that based upon a single investigator’s findings that an employer has wrongly failed to pay Worker’s Compensation, the WCB has the power to force a company to cease and desist from all business activity, via a “stop-work” order.

Not to be left out, the New York State Legislature and Governor, in September, 2010, enacted the Construction Industry Fair Play Act, which creates a presumption that anyone working for a construction contractor is a traditional “employee” unless a series of tests is passed. Contractors who willfully engage in misclassifying employees are subject to civil and criminal penalties, which can rise to criminal fines of $25,000 and $50,000 for first and second violations, or imprisonment of up to 60 days. The officers and controlling shareholders of a violating corporation may also be found liable and subject to civil and criminal penalties.

To help our clients be prepared for the regulators’ new aggressiveness in this area, we have been providing manufacturers with a series of “do’s and don’ts” in the way they structure their subcontractor arrangements. Those “do’s and don’ts” are not calculated to evade the law, but to help confirm that a business’ contractors are not breaking the labor laws. Our advice also helps the manufacturer to avoid the appearance of wrongdoing, since even the appearance of too close a connection with a subcontractor can subject a manufacturer to lengthy, costly and destructive legal proceedings.

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