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Matthew A. McKinney

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Pennsylvania Targets Worker Misclassification: Steep Costs Await Uninformed Employers

Matthew McKinney, Esq., mmckinney@tuckerlaw.com, (412) 594-5605

Pennsylvania is placing an emphasis on employee classification. Recent investigations into misclassification have revealed a more serious problem than previously imagined that is costing Pennsylvania employees and taxpayers. As a result, the Pennsylvania Department of Labor and Industry is investigating even well-intentioned employers who might not be aware of the relevant legal landscape. 

Employee classification is a complicated, ever-changing area of the law, which can make it difficult for employers. Even employers who genuinely want to do the right thing and attempt to classify their employees accurately under the law can misinterpret a statute or be unaware that a particular statute even exists.

In the United States, there are dozens of tests for determining who is an independent contractor and who is an employee. At the federal level alone, agencies have employed numerous tests, such as the common law control test utilized by the IRS, a 16-factor test used by the EEOC, and the ABC test, just to name a few. The Department of Labor alone has shifted significantly in its approach to classification over the previous fifteen years. In 2015, the Obama Administration adopted an expansive view of the employee relationship, only for it to be rolled back when the Trump Administration came to power and withdrew the Obama-era rules. Then, in 2021, under the Biden Administration, the DOL adopted a 5-factor economic reality test. In January of 2024, the DOL issued its Final Rule, which included adoption of a more complex and stringent “totality of the circumstances” standard, under which no one factor is assigned any predetermined weight.

Just in Pennsylvania, employers may not realize that there are multiple tests used to determine whether someone is an independent contractor or an employee. For example, under the Pennsylvania Minimum Wage Act, a six-factor economic reality test is used, and the Pennsylvania Workers’ Compensation Act utilizes a right to control test. Ignorance of just one of the above-mentioned rules could land you in hot water with the Department of Labor, the Pennsylvania Department of Labor and Industry, or both.

Pennsylvania is among those states prioritizing fighting worker misclassification. In January of 2021, the state launched a bipartisan Joint Task Force on Misclassification of Employees, charged with identifying problems and providing solutions moving forward. They issued a final report on December 1, 2022. Below are just some of the Task Force’s findings:

  • 5.3: Average number of misclassified employees found per employer audit conducted by the Office of Unemployment Compensation Tax Service
  • 10,892: Estimated number of misclassified employees who suffered injury or illness at work and were denied Workers’ Compensation in 2021
  • 48,939: Annual number of employers who currently misclassify at least one employee
  • 259,000: Annual number of misclassified employees in Pennsylvania
  • $383,414.74: Estimated losses to the Uninsured Employers Guarantee Fund due to misclassification in 2021
  • $91,000,000: Annual lost revenue to UC Trust Fund due to misclassification
  • $6.4 million to $124.5 million: Estimated range of lost revenue to General Fund due to misclassification in tax year 2019
  • $153,365,895.20: Estimated losses to misclassified employees who suffered injury or illness at work in 2021 without workers’ compensation insurance.

Suffice it say, the Task Force determined that worker misclassification is a serious problem in Pennsylvania. Since the report came out, Governor Shapiro has established a collaborative effort between Pennsylvania and New Jersey to crack down on wage theft and work misclassification in both states, the state legislature is weighing a series of laws aimed at guarding against misclassification, and the Pennsylvania Department of Labor and Industry has ramped up its investigations.

These investigations do not focus only on large companies either. Any employer that misclassifies a worker could be subject to fines and penalties at the state and federal level. Given the convoluted nature of the laws governing classification, employers operating with the best of intentions could still find themselves facing fines, so it is as important as ever for employers to consult their employment attorneys on all the relevant laws before making classification decisions.

For more information, contact Matthew McKinney at mmckinney@tuckerlaw.com or call him at (412) 594-5605.

February 20, 2024

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