Louisiana’s worker misclassification law suspended over federal conflict

(The Center Square) – A Louisiana “safe harbor” provision protecting businesses that make first-time mistakes when classifying employees as independent contractors has run afoul of the U.S. Department of Labor.

The Fresh Start Program, known as Act 297, allows employers to reclassify workers and avoid related withholding tax, unemployment tax, interest or penalties for prior periods upon first offenses.

The legislation, passed earlier this year, was aimed at shielding employers who come forward voluntarily as well as those regulators catch, providing reclassification occurs within 60 days.

The U.S. Labor Department has objected, however, saying recently that waiving employer liability for unemployment insurance back taxes is “not permissible under federal unemployment compensation law.”

The Louisiana Workforce Commission (LWC) issued an emergency declaration in response, stating that Louisiana would be risking federal funding if the safe-harbor provision was implemented Jan. 1 as scheduled.

LWC also adopted an administrative rule suspending the relief provision, which the Louisiana Department of Revenue has subsequently endorsed, saying “the Fresh Start Program will be delayed while the Emergency Rule remains in effect.”

“It is imperative that the LWC proceed expediently and take immediate action with this Rule because of the adverse impact COVID-19 has had on the UC trust fund balance and businesses in the state,” the emergency declaration reads. “Failure to adopt this Rule on an emergency basis may imperil LWC’s ability to receive federal funding for failure to meet conformity requirements.”

Fresh Start was signed into law with broad bipartisan support. The issue united many lawmakers, as well as the Louisiana Association of Business and Industry and AFL-CIO, the state’s largest business group and labor union, respectively.

Businesses that misclassify their employees as independent contractors can get out of paying the taxes that support unemployment benefits, forcing businesses that follow the law to shoulder more of the tax burden.

The issue has garnered additional attention as the state’s unemployment insurance trust fund was depleted during the COVID-19 pandemic-related economic downturn.

Companies that avoid paying some of their taxes also gain a competitive advantage over those that do, some lawmakers have said.

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