
Independent Contractor Classification Among First Bills Introduced By Senate Dems
January 15, 2025
Among their earliest bills introduced this year, Senate Democrats are resurrecting the proposal penalizing businesses for improperly treating an employee as an “independent contractor,” setting up fines and charges for not paying wages and benefits.
Sen. Kevin Hertel (D-St. Clair Shores), the sponsor of SB 6, said his legislation works to address payroll fraud that’s been seen from bad actors in Michigan who use different classifications for workers to get around certain labor requirements.
“The vast majority of business owners are good actors here in the state of Michigan, but there are bad actors who basically use loopholes within the law to take advantage of workers,” Hertel said. “People work because they need to support themselves and their families, and (there) should be a respectful relationship between the employee and the employer, whoever that is.”
The legislation, including SB 7 by Sen. Darrin Camilleri (D-Trenton), creates a system where employers must respond within 30 days to a worker’s request for wage information for “similarly situated employees,” covering a timeframe of up to three years prior.
For independent contractors, the legislation defines them as someone who is free from the payer’s “control and direction” in connection to their work performance.
Additionally, an independent contractor must do work outside the payer’s usual course of business and should be “customarily engaged” in the trade, occupation or business they’re doing for the payer.
Misclassifying someone as an independent contractor with “the intent to defraud” can result in a $1,000, one-year misdemeanor, with second or subsequent violations resulting in a $10,000, two-year felony.
Some of the legislation’s highest penalties for intent to payroll defraud include a 10-year felony – and a fine worth three times a worker’s wage and fringe benefits – for not paying wage and fringe benefits worth $20,000 to $49,999. For wages and benefits worth $50,000 to $99,999, the punishment will be a 15-year felony and a fine worth three times the compensation’s value.
According to a report by the Association of Certified Fraud Examiners (ACFE), payroll fraud – which can include acts of misclassifying employees in IRS reports and underpaying workers as a cost-savings measure – made up 15 percent of reported occupational fraud schemes in the United States and Canada.
As for how the occupational fraud was initially detected, 16 percent were discovered through management reviews, 15 percent through internal reviews and 8 percent by accident. Law enforcement notices and confessions each accounted for 2 percent of discoveries.
In April 2021, the Governor signed an executive order requiring state contract bidders to certify that their employees are properly classified. At the time, her office relayed a report by the Economic Policy Institute posting that $429 million annually in “earned wages” was not paid to workers.
Legislation similar to Hertel and Camilleri’s SB 6 and SB 7 was the previous HB 4390 by former Rep. Jim Haadsma, a Battle Creek Democrat. However, even during the Democratic trifecta of the 2023-24 term, the legislation was not voted on by a whole chamber or committee panel.
“I’m generally not a fan of punishing people who make honest payroll calculator mistakes and are not trying to run a scam. Anyone who runs a scam should get the full punishment of the law, but those who make an honest mistake shouldn’t have to get the chair,” said David Worthams, the Michigan Manufacturers Association’s employment policy director.
Also ready to oppose the legislation is the National Federation of Independent Business (NFIB), which is concerned that the bills mirror California’s September 2019 “employment status” law. The California statute uses the same three factors for defining an independent contractor as Senate Democrats’ bills, which has been called the “ABC test.”
Amanda Fisher, NFIB’s Michigan state director, illustrates that California’s law has affected entrepreneurs ranging from yoga instructors and pool cleaners to independent truckers and landscapers.
“I think you will find that a lot of folks that are sole proprietors would be kind of wrapped into this independent contractor rule,” Fisher said to MIRS. “Unfortunately, the ultimate goal I see is to get rid of independent contractors all together and make everybody employees. The problem with that, ultimately, is that not everybody wants to be an employee.”
She said there are a lot of small businesses that want to do one thing for several different companies, wanting to design their own hours and have independence over their services.
“The penalties and making those felonies on par with causing death and sexual abuse to children is really quite awful,” she said. “The fact that you’re now making it so a business owner could end up with a felony, at the same time you’re trying to expunge records for violent offenders, I actually find (it) just incredibly offensive.”
The Senate Democratic caucus touted SB 6 and SB 7 in the same press release regarding their tipped credit, minimum wage and earned sick time reforms, addressing changes scheduled by the Michigan Supreme Court’s adopt-and-amend ruling.
“I think it’s all part of the conversation that we should be having about fair wages, about fair worker protections (and) about the rights that workers have here in the state,” Hertel said about the relationship between the three subjects. “I wouldn’t say they are directly tied to one another, but they are part of the conversation that we should be having.”
Article courtesy MIRS News for SBAM’s Lansing Watchdog newsletter
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