Frequently Asked Questions (FAQs) for Businesses - Worker Classification Protection

• What is Workplace Fraud?
• What industries does the Workplace Fraud law apply to?
• How can I be sure I am properly classifying my workers?
• What are my obligations when I hire independent contractors?
• How is the Workplace Fraud Act enforced?
• What are the penalties for workplace fraud?
• How is it determined if an employer has "knowingly failed" to properly classify an individual worker?
• If I would like additional information, what should I do?

Q: What is Workplace Fraud?
A: Workplace Fraud occurs when an employer misclassifies an employee as an independent contractor.  Employers who misclassify employees avoid paying payroll taxes, unemployment insurance taxes and workers' compensation premiums.  The practice of misclassification is illegal regardless of whether the misclassification was intentional or due to a mistaken belief that the workers were independent contractors.

Q: What industries does the Workplace Fraud law apply to?
A: It is a violation of the law to misclassify any worker, regardless of industry or occupation.  However, Maryland's Workplace Fraud Act applies specifically to misclassification of individuals in the construction and landscaping industries.

Q: How can I be sure I am properly classifying my workers?
A: Different state and federal agencies use different tests to determine whether a worker is an employee or an independent contractor for different purposes.  For purposes of the Workplace Fraud Act as well as Maryland's Unemployment Insurance law, the State has adopted what is commonly referred to as the "ABC Test."

1. The individual is free from direction and control;
2. The individual customarily is customarily engaged in an independent business of the same nature as that involved in the work; and
3. The work is outside the usual course of business of the person for whom it is performed OR the work is performed outside any place of business of the person for whom it is performed.

Q: What are my obligations when I hire independent contractors?
A: The Workplace Fraud Act requires businesses in the construction and landscaping industries to give an individual classified as an independent contractor or an exempt person with whom they do business, written notice of the individual's classification and an explanation of what that classification means.  (Under the Workplace Fraud Act, an exempt person is an individual who operates a business as a sole proprietor and has no employees other than a parent, child or spouse.)  A business must also post a notice in the workplace.  These notices must be provided in both English and Spanish.  A business must use the notices provided by MD Labor.

Covered businesses must also keep records containing the following information for at least three years:

1. The name, address, occupation, and classification of each employee or independent contractor;
2. The rate of pay for each employee or method of payment for each independent contractor;
3. The amount paid each pay period to each employee or independent contractor;
4. For each independent contractor or exempt person hired, the regulations further require that the employer keep at the work site or place of business
1. A description of the employer's business or a copy of a contract between the employer and the independent contractor or exempt person;
2. Forms signed by the independent contractor of exempt person acknowledging that they received notice of their classification; and
3. Copies of any licenses or registrations provided by an individual classified as an independent contractor or exempt person.

Q: How is the Workplace Fraud Act enforced?
A: The law gives the Commissioner of Labor and Industry or his designee the authority to investigate possible misclassification in the construction and landscaping industries.  The Commissioner or his designee may enter a place of business or worksite for purposes of conducting an investigation; may require the production of certain documents pertaining to the working relationship between the parties; may issue subpoenas to compel written records or testimony; and may pursue judicial relief and may assess fines if a business fails to comply.

Q: What are the penalties for workplace fraud?
A: Employers who are found to have misclassified workers have 45 days to pay restitution to misclassified workers and come into compliance by classifying the workers correctly, without additional civil penalties.  In order to come into compliance, an employer may also be required to enter into agreements with governmental units including, but not limited to Labor's Unemployment Insurance Division and the Maryland Comptroller, to pay any amounts owed on the employees' wages for a period not to exceed 12 months preceding the citation.

Q: How is it determined if an employer has "knowingly failed" to properly classify an individual worker?
A. The Workplace Fraud Act defines "knowingly" as "having actual knowledge, deliberate ignorance, or reckless disregard for the truth.  An employer with a previous violation under the Workplace Fraud Act or other similar state or federal law involving workers engaged in similar services under similar circumstances is considered to have "knowingly" misclassified its employees.  Failure or refusal to produce requested records or to cooperate with an investigation will also result in a finding that the misclassification was a "knowing" violation of the Act.  In addition, a violation will be considered a "knowing" violation if there is any evidence that the employer treated other workers performing similar tasks under similar circumstances as employees or if there is any other evidence that the employer knew the worker was misclassified but deliberately ignored or recklessly disregarded the law.

Q: If I would like additional information, what should I do?
A: Contact the Worker Classification Protection Unit of the Division of Labor and Industry by email or by telephone at 410-767-9885.  You may also contact the Program Manager by e-mail or by calling 410-767-9885.