Legal Updates

Connecticut Increases Penalties For Misclassifying Employees As Independent Contractors

June 2010 by William E. Hannum III

On May 6, 2010, Connecticut enacted a law increasing the penalties to be imposed upon employers for misclassifying workers as independent contractors. The law will become effective October 1, 2010.

Specifically, the new Connecticut law does the following:

increases civil penalties for businesses that misclassify employees as independent contractors from $300 per violation to $300 per day per violation;

authorizes the Connecticut Attorney General, upon complaint from the Labor Commissioner, to institute civil actions to recover these monetary penalties;

makes it a Class D felony to either misrepresent the number of its employees or cast them as independent contractors in order to defraud or deceive the state so as to pay lower workers’ compensation insurance (the penalty under this law previously extended only to fraud and deception of insurance companies);

makes it a Class D felony for any employer that is fully insured for workers’ compensation to fail to pay the required state assessments for administration of the Workers’ Compensation Commission and the Second Injury Fund; and

authorizes enforcement officials to mount joint investigations of misclassification complaints with other state agencies.

Connecticut Attorney General Richard Blumenthal, who co-chaired the commission recommending passage of the new law, commented that “calling workers independent contractors when they are really employees costs workers benefits, taxpayers revenue and honest businesses a fair opportunity to compete for work.”

The new Connecticut law is particularly daunting to employers given that different Connecticut agencies use different rules to determine a worker’s employment status, as illustrated below:

1. Common Law Rules – Like the federal Internal Revenue Service, the Connecticut Department of Revenue Services looks to “common law rules” to determine whether a worker is an independent contractor. Under these rules, a worker is an “employee” when the business for which the services are performed has the right to direct and control the worker who performs the services. The rules take into account three major factors: (a) behavioral control (e.g., when/where to do the work, what tools/equipment to use, what routines/patterns to use, and what workers to hire to assist with the work); (b) financial control (e.g., whether the worker has a significant investment in facilities and equipment, whether the worker’s business expenses are reimbursed, how the worker is paid, and whether the worker has an opportunity for profit or loss); and (c) relationship of the parties (e.g., the intent of the parties, whether the worker receives a Form W-2 or 1099-MISC, whether the worker is providing services as a recognized corporate entity, and whether the worker is receiving employee benefits that are traditionally associated with employee status).

2. The “ABC Test” – The Connecticut Department of Labor’s Unemployment Compensation Division uses an “ABC” test to determine whether a worker is an independent contractor. In order to properly classify a worker as an independent contractor under this test, an employer must satisfy all three of the following criteria: (a) the individual must be free from direction and control in connection with the performance of the service, both under his or her contract of hire and in fact; (b) the individual’s service must be performed either outside of the usual course of business of the employer or outside all the employer’s places of business; and (c) the individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service performed.

3. The Workers’ Compensation Commission Criteria – The Connecticut Workers’ Compensation Commission determines a worker’s status by applying various concepts, factors and criteria from the above tests, but without resort to a specific rule, an approach that encourages employers to make classification determinations conservatively.

Connecticut employers should perform an independent contractor audit and risk assessment to ensure that their workers are properly classified. In light of the significant penalties contained in the new law, employers are encouraged to classify their workers in accordance with the most restrictive test. That is, if a worker would be considered an employee under any of the three tests, then he or she should be classified as such.

* * *

If you have any questions about the proper classification of employees and independent contractors under federal law, in Connecticut, or in any other state, please do not hesitate to contact us. We regularly assist employers in this area and would be happy to help.