Delaware has become the latest state to impose stiff penalties on construction industry employers who improperly classify employees as independent contractors to save on business costs and avoid paying appropriate taxes.
On July 31, 2009, Delaware Governor Jack Markell signed into law House Substitute No. 1 for House Bill No. 230, which imposes significant monetary and other penalties on “construction services” employers who willfully misclassify employees as “independent contractors.”
The Delaware action follows similar recent enactments in Maryland and Colorado. Other states that have similar statutes include Illinois, Indiana, Minnesota, New Hampshire, New Jersey, Rhode Island, and Washington.
The Delaware Department of Labor is responsible for accepting and investigating complaints under the new law and for its enforcement. The Act directs the DDOL to adopt regulations to “further explain” and provide examples of the prohibited conduct. The law presumes that an employer-employee relationship exists when work is performed for remuneration, and places the burden on the employer to convince the DDOL that the person is an independent contractor or otherwise exempt. If the DDOL initially determines that a violation has occurred, the employer has a right to an administrative appeal.
In addition to penalties of $1,000-$5,000 per misclassified employee, employers who fail to produce requested records can be issued a stop-work order by the DDOL and fined up to $500 per day for each day during which the requested records are not produced. An employer that retaliates against a person who made a complaint or provided information to the DDOL is subject to a penalty of no less than $5,000 up to $10,000 for each violation.
Also, persons who create or assist in creating legal entities to avoid detection of violations are subject to fines of up to $20,000. Employers found to have violated the Act twice in two years are subject to debarment from public contracts for up to five years and may be assessed an administrative penalty of $20,000 per improperly classified employee.
If the DDOL is notified of an alleged violation and has not taken action either by investigating or filing a lawsuit in 90 days, the “person alleging a violation” may file suit for declaratory relief and “actual damages,” which is defined to include “treble damages for lost wages or benefits” as well as attorney’s fees and costs. The law also requires employers to keep certain records pertaining to both employees and independent contractors and to retain those records for three years.
See these posts for information about similar proposals affecting employment laws and independent contractors: