House Committee Considers Expansive Employment Law Changes Impacting Use of Independent Contractors, Noncompete Agreements, Wage Disclosure and More

Advocacy News – April 14, 2023

House Labor Committee heard testimony on a package of 16 bills Thursday, ranging from a California-style definition on who can be classified as an independent contractor to wage transparency requirements to regulating noncompete agreements to allowing private individuals to sue on behalf of the State and more.

The Michigan Chamber testified at the hearing, stressing the dramatic impact the bill package could have on businesses and workers across the state and urging more time for careful consideration of how the bills are constructed and consequences.

A full rundown of the bills can be found below, but we need your feedback!  We expect there to be additional hearings on this legislation in the coming weeks. If you have specific thoughts on these proposals, would like to share how this legislation would impact your company or workers, or would like to learn more about how you can get involved or make your voice heard, please contact Wendy Block, SVP of Business Advocacy & Member Engagement at wblock@michamber.com.

The bills:

Limitations on the Use of Independent Contractors –

House Bill 4390, which mirrors legislation passed in California in 2019, would establish an “ABC test” for independent contractors.

Here are the top five things Michigan employers should know about this proposal:

1. The legislation seeks to limit the ability of all employers to use independent contractors.  Under the proposal, for a worker to be properly classified as an independent contractor, companies would need to establish the individual meets all three components of the ABC test:
   1. “The individual is free from control and direction of the [hiring entity’s] in connection with the performance of the work, both under contract and in fact.”
   2. “The individual performs work that is outside the usual course of the [hiring entity’s] business.”
   3. “The individual is customarily engaged in an independently established trade, occupation, or business of the same work performed by the individual for the [hiring entity].”
2. The bill contains no exemptions.  Unlike the California law, which carves out over 109 types of workers, the Michigan bill contains no such exemptions.  Some of CA’s exemptions include: most outside salespeople; insurance underwriters, auditors, and risk managers; medical professionals like doctors, surgeons, dentists, and veterinarians; other licensed professions, including lawyers, architects and landscape architects, engineers, and accountants; investment advisers; individuals providing feedback to data aggregators; grant writers; graphic designers; freelance writers and editors; real estate appraisers; and more.  California’s ABC test also does not apply to working relationships between most bona-fide business-to-business contracting relationships.
3. Under the ABC test, workers are presumed to be employees. The legislation would require employers to bear the burden of proof by a preponderance of evidence, that they did not misclassify an individual as an independent contractor. They must prove the three factors of the 3-factor ABC test.
4. The bills contain steep penalties for the misclassification of a worker as an independent contractor.  The bills make misclassifications a misdemeanor offense, punishable by a fine of not more than $1,000, imprisonment for up to a year, or both.  In addition, the bill would allow the state to order back pay and benefits and a penalty at the rate of 100% annually on the wages and fringe benefits owed, beginning at the time the business is notified that a complaint was filed and ending when payment is made.  Finally, the state would be permitted to order the payment of exemplary damages of up to three times the amount of the wages and benefits that were due to the employee, if the violation is deemed flagrant or repeated, as well as attorneys’ fees, hearing costs and transcript costs.  The state may assess a civil fine of up to $10,000.
5. The bill could result in higher labor costs.  If the Legislature forces more employers to classify more workers as employees, those individuals may lose the flexibility they desire (e.g., more control over how, where and when they work and/or how they carry out their duties).  Some gig economy jobs may disappear.  There may be additional costs associated with requiring more workers to be treated as employees, such as needing to pay unemployment taxes on those workers, purchase workers’ compensation insurance, and/or provide additional benefits such PTO or health insurance benefits.  These costs may have to be passed on to consumers or could force certain industries to automate their workforce to adjust to these changes.

Mandatory Wage Transparency –

House Bill 4406 would allow employees to request “wage information for similarly situated employees covering a period of not more than three years.”  Although the legislation would allow employers to redact names, the information provided must include information about the sex and seniority of the similarly situated employees.  The wage information provided would need to include salary and hourly wage information as well as information about bonus pay, overtime pay and other forms of compensation.   Another bill in the package (HB 4401) would make violations of HB 4406 a felony level offense, punishable by imprisonment for not more than two years, a fine of up to $10,000, or both, for each violation.

Proponents of the legislation say the bills are intended to accelerate pay parity by narrowing the gender pay gap and fostering an engaged and positive working environment that builds trust.  However, we warned lawmakers in testimony that these policy changes can often have unintended consequences.  For one, businesses are left to justify to disgruntled employees the rationale behind pay differentials and responding to requests for raises in order to address them…and no budget dollars available to be able to adjust quickly.  Further, the bill largely ignores the numerous reasons employees might be subject to different hourly wages or salaries.  This includes things not contemplated by the bill sponsor, including resume gaps, career changes, education levels and the like.

Restrictions on the Use of Non-Compete Agreements

House Bill 4399 would prohibit all businesses from obtaining non-compete agreements unless it (1) provided the application written notice of the requirement; (2) disclosed to the employee or applicating in writing the terms of non-compete agreement; and (3) displayed a poster of the bill’s requirements at the worksite.  The bill would prohibit businesses from requesting or obtaining a non-compete from an employee or applicant who is hired as a “low-wage employee.”  A low-wage employee is defined under the bill as being a minor or an individual who receives annual wages from the employer at a rate that is less than 138% of the last published federal poverty line for a family of three.  Wages are defined to include commission but do not include bonuses or overtime earnings.

The bill would make violations of the low-wage employee requirements subject to a civil infraction of $5,000 for each employee or applicant who is the subject to a violation and would require the employer to bear the burden of proof that the employee is not a low-wage employee.  If a court voids an unreasonable non-compete, the employee or injured party would be eligible for actual costs associated with defending themselves, including reasonable attorney fees, and recovery of all lost income associated with actual or threatened enforcement of the void noncompete agreement or the unreasonable terms of the noncompete agreement.

Qui Tam Lawsuits (False Claims Act)

House Bill 4398 would create a state “False Claims Act” including qui tam provisions that authorize private plaintiffs to sue on behalf of the state and collect a bounty if there is recovery. While we are continuing to learn more about the impact of this legislation, we know this type of legislation, which has been passed in other states, incentivizes private citizens to find avenues to sue businesses for personal financial gain under the guise of serving the state’s interest.  And it creates an opening for opportunistic plaintiffs and their attorneys to recover windfall awards based on conduct that is not truly fraud, but may be a minor technical, regulatory, or contract issue with a state entity.

The 11 other bills in the package, many of which we are still studying and seeking to better understand, include:

• HB 4391 – Requires Treasury to issue notice to 1099 employees regarding the new independent contractor rules in HB 4390 and update the state’s book related to tax filings.  (No notice to employers required.)
• HB 4392 – Updates Whistleblower Protection Act to create reference to State Employee Ombudsman (created by HB 4397).
• HB 4393 – Makes a $5m appropriation to the Attorney General for 25 full-time employees (FTEs) for independent contractor and payroll fraud enforcement.
• HB 4394 – Allows an individual to make an anonymous complaint to the state regarding wage, benefit and recordkeeping requirements.
• HB 4395 – Similar to HB 4394, allows for anonymous complaints to be filed for violations of the minimum wage law.
• HB 4396 – Expands existing whistleblower protections to independent contractors and prospective employees and prevents adverse actions against them.
• HB 4397 – Creates an Office of the State Employee Ombudsman and gives it power to commence investigations and investigations and report findings. Would apply to all violations of MI law, including items related to the endangerment of public health and misuse of public funds.  They would have subpoena power and can pursue “all administrative penalties.”
• HB 4402 – Creates a felony schedule for the mis-payment of wage, fringe benefits and recordkeeping requirements.
• HB 4403 – Creates misdemeanor and felony provisions for the mis-payment of wage, fringe benefits and recordkeeping requirements with “intent to defraud.”
• HB 4404 – Changes the penalties from 10% per year to 100% per year for violations of wage, fringe benefits and recordkeeping requirements. Increases civil fines from $1k to $10k.
• HB 4405 –  Amends the requirement for written notice of garnishments and deductions.  Requires at least 1 pay period (current law) or (new in this legislation) 10 business days, whichever is greater.