Don’t Do It. Willful Violations Mean Big Fines.

Wage & Hour Law Violators and the ACA in 2016

Employment statusWith complex ACA reporting looming large in 2016, employers are getting nervous about reporting requirements. Some employers might even be tempted to misclassify their employees as independent contractors, under report hours, or deliberately file incorrect information to avoid employer shared responsibility. Do so at your own risk. The system of checks and balances for employers will be strict and the focus will be on watching for willful violations. In 2016, the IRS and the Department of Labor in conjunction with The Labor Enforcement Task Force (LETF) 1 will be watching for those violators.

One of the side effects of the ACA is that portions of the law are meant to crack down on what is called the “underground economy.” 2 The underground economy refers to the tendency for employers to hire undocumented immigrants and classify them as independent contractors to avoid paying the going wage, health insurance premiums, and workers’ compensation. As employers get used to the new requirements, some checks and balances are built in for those who make honest mistakes. However, the penalty for deliberate misfiling is steep and meant to hurt. Now, employers will not only feel the sting from mis-classification violations from the Department of Labor , they will solicit hefty fines from the IRS for non-compliance with ACA reporting regulations.

Good Faith vs. Scofflaw Reporting

It’s generally expected that over the next few years when it comes to reporting, more employers will get it wrong than right. Once an employer has filed, they can expect to undergo rigorous scrutiny. The law has built in a pressure relief valve for employers who file with errors. If it’s an honest error, there’s help. However, if it’s a deliberate attempt to avoid employer shared responsibility, the law will not treat those kindly.

Employers that make a good faith effort to correct the filings will likely receive a fine reduction and in certain cases, no fine at all. An employer who reports incorrect information and makes an effort to correct that information by April 1, that employer will most likely not incur a penalty. Filing errors that are corrected by August 1, the employer may incur a penalty but it will be substantially reduced. The story will be quite different for those who avoid corrections or don’t file at all.

Signed in July of 2015, the Trade Preferences Extension Act, in effect doubles fines for violators who willfully disregard the ACA reporting mandate. The Department of Labor will be paying close attention on those who willfully report incorrect employee hours and misclassify employee status to avoid expenses. For these employers, they will not only get stuck with big fines from the LETF, they can also face fines up to $250 per day per employee. Prior to signing the Trade Preferences Extension Act, violation fines were capped at $3,000,000. With the new legislation there is no cap on the amount of fines they can accrue.

Case Studies and a Reality Check

To put this into perspective, we examined a recent list of employers who have already been found guilty of willful disregard of the following laws: Deliberate misclassification of employees, under reported wages, attempt to hide undocumented immigrant workers, disguise overtime hours, failure to pay the minimum wage, or provide proper breaks and meal times. In the scenarios below, we looked at first, the fines they incurred and then, had the ACA regulations that start in 2016 already been in use, the additional fines they would have been charged with. For those who are contemplating misclassifying or hiding employees as independent contractors, take this as a warning.

Case Study 1

The California Labor Commissioner issued nearly $460,000 in citations against a janitorial company for underpaying mostly immigrant workers and refusing to give them breaks. The janitorial service3 threatened to fire janitors, most of whom were immigrants from El Salvador, who complained about working long hours without breaks for seven days a week, for weeks at a time. The wage theft violations extended to 12 janitors, over the course of two years. In 2016, the fines for failure to report in compliance with ACA reporting violations will be $250/per day per employee. Had those been in effect, that would have been 12 people for 24 months, at $250 per employee per day. The fines from the Department of Labor would have been $2,190,000. When added to the total wage and hour violation fines already incurred, this brings the employers’ potential liability to $2,650,000.

Case Study 2

The California Labor Commissioner cites a residential care facility4 and its owners, $2.2 million for wage theft. The investigation revealed that nine caregivers were forced to work 24-hour shifts, six to seven days a week, for $1.25 to $1.80 per hour, from September 2013 to August 2014. With ACA violations, this would be equal to fines of $751,500; bringing their total fines to 2,951,500.

Case Study 3

For three years, 43 workers of a Sacramento landscaping company were cheated out their wages. The California Labor Commissioner issued a levy of $664,764 against the employer for wage theft violations. The landscaping company5 was using a work force of up to 43 employees while reporting less than 10 employees on its payroll and classifying the rest as independent contractors. ACA violation fines, if they had been enacted during this time would have totaled $11,771,250; bringing this landscaper’s fines to $12,436,014.

Wrapping it up

The ACA isn’t just health care reform; it’s also a wage and hour reform. Violations of the wage and labor laws in conjunction with ACA reporting fines can bring even the biggest employers to their financial knees with penalties. In the coming years, the political climate may change its focus but it’s fair to say that going forward, the government will continue to enact new ways to prevent illegal hiring. Employers will need to be forthcoming about who works for them, how often, and how much they are paid.

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  1. LETF was specifically designed to combat employers who fail to follow wage payment laws through wage theft (nonpayment of earned wages) or paying less than the minimum wage. It is specifically designed to eradicate the “underground economy” including employers who pay workers “under the table” (meaning illegally paying workers on a cash basis or “off the books” without paying employment taxes, social security and similar taxes.) This includes misclassifying employees as independent contractors.
    1. Labor Enforcement Task Force LETF comprised of:
      1. Division of Occupational Safety & Health (Cal/OSHA)
      2. Division of Labor Standards Enforcement (DLSE)
  • Employment Development Department (EDD)
  1. Contractors State Licensing Board (CSLB)
  2. California Department of Insurance (CDI)
  3. Board of Equalization (BOE)
  • Bureau of Automotive Repair (BAR)
  • State Attorney General (DOJ)
  1. Alcoholic Beverage Control (ABC)
  1. The term “underground economy” refers to any business which operates without the necessary licensing, does not pay taxes or carry the required insurance or worker’s compensation coverage, or forces its employees to work in unsafe conditions, or otherwise attempts to gain an unfair economic advantage by avoiding its tax and labor responsibilities. Common “underground economy” practices include: Tax evasion, Failure to carry workers’ compensation, coverage, Cash pay, Failure to provide employees with breaks and adequate facilities, Wage theft, Failure to ensure a safe work environment.