Department of Labor Audits – Are You Vulnerable?

by G. Spencer Mynko, Esq.

Those of you who read my articles know that I have written extensively about EDD (Tax) Audits and EDD’s campaign against trucking companies who misclassify employee drivers as independent contractors.  No doubt EDD’s war against trucking companies continues unabated in their never ending quest to fill the state’s coffers.  But there is another growing threat to trucking companies that I predict we will be hearing more and more about:  Department of Labor Audits.

The Department of Labor enforces wage and hour, workers’ compensation, labor code laws, and misclassification of employees as independent contractors.  Traditionally, these audits target industries like construction, landscaping, agriculture, and others who rely on minimally skilled workers.

More recently, Department of Labor Audits are focusing on more and more on industries who misclassify employees as Independent Contractors.  And, rightly or wrongly, trucking companies have a reputation for misclassifying drivers as Independent Contractors.  Trucking companies need to take notice: Department of Labor Audits can be devastating.

Here in California, our state Department of Labor is known as the Department of Industrial Relations (DIR).  “The DIR was established in 1927 to improve working conditions for California’s wage earners and to advance opportunities for profitable employment in California. DIR administers and enforces laws governing wages, hours and breaks, overtime, and coordinates with other agencies to target egregious violators of labor laws and tax laws in theUnderground Economy.”   Misclassification of drivers as Independent Contractors is considered part of the Underground Economy because it is a method of tax evasion and is used to avoid paying for workers’ compensation insurance.

Unlike EDD where you get a letter stating that you are being audited and gives you time to respond, the Department of Industrial Relations (DIR) can raid your business with Inspectors who wear badges, carry guns, and are classified as police officers.  The DIR doesn’t call their unannounced visits “raids”, but instead refers to them as “sweeps”.  While “sweep” may sound more benign than “raid”, in reality it is not: Typically, as soon as the “sweepers” arrive and identify themselves, they demand that everyone stop what they’re doing and then they check identification. Next, they inspect for labor law violations, safety violations, overtime violations, minimum wages, look at your record keeping practices, check for tax non-compliance, determine if you have misclassified workers,insure you have the proper licensing and anything else observed while onsite.It’s not uncommon for the business to be ordered to be closed down immediately and “citations” to be issued for many thousands of dollars. In these cases, the business is not allowed to reopen until they “fix” the problems and receive an “OK” from the inspectors.

What triggers these “sweeps”?  Well, consider this: California’s government employs hundreds of employees whose only responsibility is to find businesses to inspect.  These cyber-detectives spend all day:

  • Scanning government data bases, comparing them for inconsistencies
  • Surfing the internet
  • Searching the yellow pages
  • Following up on complaints from former, or current, workers who are disgruntled.
  • Making “drive-by’s” to observe business operations

Other big triggers are: A worker filing a claim for a work injury who is not covered by Workers’ Compensation insurance and EDD “nominating” a business for “unannounced inspections”  if they suspect the business is misclassifying it’s employees as Independent Contractors. 
What are the implications here: big time penalties and fines:

Sections 226.8 and 2753 of California Labor Code authorize California’s Labor and Workforce Development Agency to assess civil penalties of not less than $5,000 and not more than $15,000 for each violation in addition to those civil penalties already permitted by law. The civil penalties increase to $10,000 and $25,000 for each violation if the Agency determines that the employer has engaged in a pattern, or practice, of willful misclassification of its employees as independent contractors. The worker can file a complaint with the Labor Commissioner and the Labor Commissioner can assess the above-mentioned civil penalties against the employer if the Labor Commissioner determines that the employer has in fact misclassified the employee.

The misclassified employee can seek up to three years worth of unpaid wages (including overtime and meal and rest break violations), unreimbursed businesses expenses, and penalties for violating various California Labor Code provisions (Labor Code §203, §210, §226.3, §2802 and §3710.1; California Unemployment Insurance Code §§1112, 1113.2, and 2118).  California business owners may also face exposure to tort liability for injuries suffered by employees when workers compensation insurance was not secured (Labor Code §3706), for unfair business practices (Business and Professions Code §17200), and even potential criminal liability under Labor Code §3700.5

Pursuant to California Labor Code § 226.3, a misclassified worker may claim that the business violated the statutory obligation to provide itemized wage statements each pay period. If the Court determines the worker was in fact an employee, the court may award additional civil penalties in the amount of $250 per employee for the first citation and $1,000 per employee for each subsequent citation. It should also be noted that under California Labor Code §226.6, a knowing and intentional violation of these requirements is a misdemeanor.

Pursuant to California Unemployment Insurance Code §§1112 and 1113 2, if a court determines that a worker was misclassified, the employer will be assessed amounts due for state income tax withholding, unemployment insurance contributions, and disability insurance contributions, unless the employer can show the income was reported and all taxes due were paid by the employee. Employers who fail to pay for unemployment insurance benefits and/or state disability insurance benefits are not only required to pay the unwithheld amounts, but may also be assessed a 10% penalty and interest on the unpaid contributions

At the federal level, the IRS is conducting random audits, and businesses found to have misclassified their workers presently face a fine of up to $5,000 per misclassified employee.

And just like EDD, the DIR and Labor Commissioner will scrutinize the relationship you have with your drivers to determine if they have been misclassified.  (Please refer to my prior articles where I discuss that process in-depth).

We hope that once you utilize Transportation Attorneys to help you get your IC agreements and business model set up, you’ll enjoy many miles of trouble-free trucking. Worker misclassification is a big deal in California.  Trucking companies who use independent contractors should carefully review their contracts and practices in order to comply with the law.  We are one of the few law firms that focuses on trucking, transportation and logistics with the knowledge and experience to competently guide you through these ever present hazards.  We are very experienced in dealing with the distinctions between independent contractors and employees.

We here at Transportation Attorneys can help you with your Independent Contractor business model and your ability to withstand  the toughest scrutinization of anyone alleging your company is misclassifying its drivers.

Contact today!