Michigan Legislature Considers Package of Bills Addressing Wage Theft, Independent Contractors, and Noncompetes

On August 29, 2019, legislators from the Michigan House of Representatives announced an ambitious package of 12 bills aimed at creating new criminal and civil penalties to combat employers that fail to properly pay wages and overtime pay. The legislation would also establish enhanced protections and penalties under Michigan’s whistleblower statute and create new civil remedies against employers for overzealous enforcement of noncompete agreements and for misclassifying employees as independent contractors.

Background

The bills’ highly publicized announcement, which was coordinated with local labor union leaders to occur just before the Labor Day holiday, aligns with Michigan Attorney General Dana Nessel’s Payroll Fraud Enforcement initiative. Nessel introduced the initiative in April 2019 when she created a payroll fraud hotline for reporting suspected violations of existing payroll and wage theft laws in effect in Michigan.

The new legislation would make employee-friendly modifications to several Michigan statutes, including the Payment of Wages and Fringe Benefits Act (PWFBA), the Whistleblowers’ Protection Act (WPA), the Michigan Antitrust Reform Act (MARA), and the Improved Workforce Opportunity Wage Act (IWOWA), and would amend the Michigan Code of Criminal Procedure to create a new felony offense for employers that commit a second or subsequent violation of certain provisions of the PWFBA.

Summary Analysis of the Bills

Below is a summary of the initial drafts of the ten House bills in the package that would have the most significant effect on private employers. It is important to note, however, that these are initial drafts of proposed legislation and are a long way from being enacted into law, especially given the current composition of the Michigan Legislature. However, the intense interest from the attorney general’s office and any changes in the makeup of the House and Senate could give the bills momentum.

House Bills 4868 and 4869. These bills would amend the PWFBA and the Michigan Code of Criminal Procedure to create a new felony offense for employers that commit a second or subsequent violation of the PWFBA by failing to pay wages and fringe benefits with “intent to defraud.”

• Two-year felony. This newly created felony is punishable by up to two years’ imprisonment and a fine of up to $10,000.
• Current penalty is a one-year misdemeanor. Under the current version of the PWFBA, violations committed with an “intent to defraud” constitute a misdemeanor punishable by up to one year of imprisonment and a fine of up to $1,000, regardless of the number of violations committed.

House Bills 4870 and 4871. These bills would amend the PWFBA and the Code of Criminal Procedure to create a new felony offense for employers that commit a second or subsequent violation of the PWFBA by prohibiting an employee from disclosing his or her wages or by retaliating against an employee who discloses his or her wages.

• Two-year felony. This newly created felony is punishable by up to two years’ imprisonment and a fine of up to $10,000.
• Current penalty is a one-year misdemeanor. Under the current version of the PWFBA, the same enumerated violations constitute a misdemeanor punishable by up to one year of imprisonment and a fine of up to $1,000, regardless of the number of violations committed.

House Bill 4873. This bill would amend the WPA to recognize additional protected whistleblower activity.

• Reports made to the press would be covered. Reports made to the press would be considered types of whistleblower activity that may serve as a basis for a cause of action brought by an employee pursuant to the WPA.
• Reports made to the state employee ombudsman would be covered. Under the bill, reports made to the newly created government position known as the “state employee ombudsman” would be considered protected whistleblower activity.

House Bill 4874. This bill would amend the MARA by imposing several restrictions on noncompete agreements along with penalties for violations of the newly enumerated restrictions.

• Advance written notice required to employees and applicants. The bill would prohibit a noncompete agreement with an employee or applicant for employment unless the employer provides written notice of the noncompete in writing before hiring. This restriction would potentially upend Michigan court decisions that presently allow employers to issue a noncompete agreement to an employee during the course of employment, without providing additional consideration.
• Unenforceable as to low-wage employees. The bill would prohibit an employer from entering into a noncompete with a “low wage” employee, defined as an employee earning less than $15.00 per hour or $31,200 per year.
• Limit on choice-of-law provisions. The bill would invalidate noncompete agreements that contain choice-of-law provisions that operate to negate the newly imposed restrictions under the MARA.
• New financial penalties. Employers that violate the MARA would be subject to the following penalties:
  • A mandatory civil fine of up to $5,000 for each employee who is a subject of the violation
  • Assessment of costs and attorneys’ fees incurred by the employee or attorney general in defending an action against enforcement of the noncompete or an action to void or limit the noncompete
  • Assessment of an amount equal to all income lost by the employee as a result of the actual or threatened enforcement of the void or unreasonable noncompete agreement at issue

House Bill 4876. This bill would create several amendments to the WPA to provide additional protections for whistleblower activity.

• Independent contractors and prospective employees would be covered. The bill would extend protection beyond employees and would cover independent contractors and prospective employees who engage in whistleblower activity.
• Reporting of “planned violations” would be covered. The bill would further extend protections to include the act of reporting a “planned violation” of law. The current version of the WPA protects only actual and suspected violations of law.
• Two-year statute of limitations. The bill would increase the statute of limitations for filing WPA claims from 90 days to 2 years after the occurrence of the alleged violation of the WPA.
• $10,000 penalty. The bill would increase the civil fine payable to the state treasurer from $500 to $10,000.

House Bill 4877. This bill would amend the PWFBA to prohibit misclassification of employees as independent contractors and impose penalties for such violations.

• Three-part definition of “independent contractor.” To be considered an independent contractor under the bill, the contractor must be:
  • free from control and direction by the entity paying for the contractor’s services;
  • one who performs work that is outside the usual course of the business performed by the entity paying for the contractor’s services; and
  • customarily engaged in an independently established trade, occupation, or business of the same work as that being performed for the entity paying for the contractor’s services.
• Penalties for the misclassification of employees. The bill sets out numerous financial penalties for misclassifying employees as independent contractors, including:
  • assessment of wages and fringe benefits owed to an employee by virtue of the misclassification, plus a 10 percent penalty per year on all such amounts;
  • exemplary damages of up to two times the amount of the wages and fringe benefits that were due if the violation is flagrant or repeated;
  • attorneys’ fees and costs; and
  • assessment of a penalty in an amount equal to the estimated federal taxes and Medicare payments that would have been due to the employee had the employer not committed the misclassification.
• Potential bootstrap for imposing criminal penalties under House Bills 4868 and 4869. House Bill 4877 does not expressly mention criminal penalties for misclassification of employees as independent contractors. However, it is as of yet unclear whether a misclassification violation under 4877 could lead to criminal penalties under House bills 4868 and 4869 for failure to pay overtime with an “intent to defraud.” Accordingly, until the legislative debate and amendment process gets underway, we cannot rule out potential criminal liability for employers that misclassify employees as independent contractors.

House Bills 4878 and 4879. These bills would amend Michigan’s IWOWA and the PWFBA to allow an employee who files a complaint against an employer under either of these laws to maintain confidentiality of his or her identity.

Final Thoughts

As Jimmy Stewart taught us all in his 1939 film Mr. Smith Goes to Washington, bills introduced on the legislative floor have a long way to go before they become law. To be sure, the potential for civil fines ranging from $5,000 to $10,000 per violation, mandatory assessment of attorneys and lost wages, and the possibility of felony criminal penalties make the legislative package something that will garner a lot of attention. Moreover, given the intense interest from the attorney general’s office and Michigan labor leaders, it is unlikely that the bills will die without significant debate and perhaps some provisions being passed into law.