The Payroll Fraud Prevention Act is an amendment to the Fair Labor Standards Act of 1938. It is designed to prevent payroll fraud, requiring employers to not only classify their employees or non-employees as employees or independent contractors but to also make work status clear to the individuals they employ. Here we offer a brief history of the Payroll Fraud Prevention Act and how it impacts enforcement.
The Payroll Fraud Prevention Act
It is unlawful for any person to:
- Discharge or otherwise discriminate against an employee or non-employee who has filed a complaint with respect to their employment classification
- Wrongly classify an employee as a non-employee
Employers not following the law will face double the amount of liquidated damages to compensate employees for unpaid wages and misclassification of employees.
Misclassification and Reporting
The bill includes amendments to the Social Security Act which dictates employers who are not registered under state law or that pay unreported wages for the federal grant program for unemployment compensation administration, auditing and investigative procedures must be identified. Penalties are imposed on employers that misclassify employees or fail to keep proper records of unreported wages. The Department of Labor must report misclassifications of an employee to its Wage and Hour Division which in turn reports misclassifications to the Internal Revenue Service.
Complaint Based Enforcement
In the past, federal and state labor standard enforcement agencies used complaint-based enforcement for payroll fraud. Workers had to complain before an employer was investigated. This method fails to protect workers as they often fear repercussions from their employers for reporting labor law violations.
Studies helped show the industries with the highest incidence of non-compliance tended to be in low-wage industries with large immigrant workforces. While many state agencies are not ready to abandon their complaint-based processes altogether others are taking a proactive enforcement approach. Some strategies currently in place include readily available anonymous telephone tip lines and internet-based reporting systems. One of the main issues for proactive investigation however is funding.
Some state agencies have introduced auditing strategies to track down misclassification violations. They use risk-based systems based on high-risk industries that are more likely to use misclassification practices. This increases the discovery of misclassified workers especially in certain industries including:
- Restaurants and hospitality
- Trucking and transportation
- Janitorial services,
- Nail salons
- Car washes
- Home health care and medical staffing
There are also localized industries and new trends in business startups that can be open to higher scrutiny by government agencies.
Misclassification in hand with “under-the-table payments” has led to many agencies adopting more effective enforcement methods. However, this also poses challenges especially when trying to track cash payments. Labor standard agencies are in a difficult position of trying to identify wage and hour violations, off-the-books compensation, and misclassification. These issues blur the lines between wage theft and tax theft.
Therefore it takes a collaborative effort to ensure wage and tax theft cases are identified and laws are enforced by the agencies affected. Many agencies are introducing specific protocols to enforce laws when complaints are received. They look at the big picture, so they can address possible violations across multiple payroll fraud and tax laws. Using worker testimony, they can put a case together regardless of the employer’s records.
Some states have even formed joint state task forces to track and address payroll and misclassification violations. When states aggregate resources they can be more strategic while also improving field operations. In fact, states such as New York have industry-specific task forces consisting of multi-agencies.
Roles involved in investigations generally include investigators, attorneys and auditors. Resource constraints often limit agency success. Larger states have increased staff numbers with hundreds available to conduct investigations. Many smaller states have little to no resources available. This leads to a backlog of cases stretching to six months and beyond, and a reduction of cases with little resources to identify and carry through enforcement measures. Areas states must focus on to improve resources include:
- Payroll fraud specific roles and training programs including standardized written materials and courses
- Improved language abilities to work with immigrant workers
- Advanced technology to improve the reporting and information collection process to get cases into the system efficiently
If states have funding, they can improve resources and assist workers seeking compensation for payroll fraud. As well, field manuals for not just government investigators, but also employers in high-risk industries can help educate everyone so people understand misclassification and payroll laws to improve compliance.
About The Author
Ingrid is the Content Marketing Manager at Paypro, managing both inbound and outbound marketing initiatives for the company. She has 15+ years’ of extensive marketing communications experience, leveraging brand awareness and strategic partnerships to increase sales revenue for a diverse group of B2B brands.