Appraisal management companies (AMCs) and appraisal firms with independent contractors in Michigan: it would be wise to pay attention to Michigan House Bills 4390 and 4391. These bills seek to bring California’s famous “ABC test” to contractor classification in Michigan and would create substantial penalties for noncompliance.
In particular, HB4390 would enact an “ABC” test nearly identical to the test created in California. Unlike California’s law, however, this bill contains no exemptions for professions and occupations that often utilize contractors.
For an AMC or firm to properly classify an appraiser as a contractor under HB4390, the AMC or firm would have the burden of establishing that all three of the following criteria are met:
(A) the appraiser or other worker is free from the control and direction of the AMC or firm in connection with the performance of the work, both under the contract and in fact; and
(B) the appraiser or worker performs work that is outside the usual course of the AMC or firm’s business; and
(C) the appraiser or worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
This is a significantly different and tougher test than currently applied in Michigan.
Part B of the ABC test is the key challenge for AMCs and firms
Among the three factors, the hardest one that AMCs and appraisal firms would have to contend with is part (B) relating to whether an appraiser’s work falls outside the regular course of business of the AMC or firm. Frankly, because an appraisal firm’s business is providing appraisals performed by its staff, rather than only managing the process of having appraisals performed by third party appraisers, it would probably be unrealistic for firms to argue successfully that the work of a contractor appraiser isn’t the usual business of the firm. AMCs also would need to carefully consider the impact of the test.
Under HB4390, if an AMC or firm failed to meet the ABC test, the business could be liable for a penalty equal to 100% of the misclassified worker’s wages and benefits due (beginning when the complaint was first filed), exemplary damages up to three times the worker’s wages and benefits when the violation is flagrant or repeated, a civil fine of up to $10,000, and an additional penalty equal to the estimated federal taxes and Medicare payments that should have been paid except for the misclassification. Attorneys fees could also be awarded against the AMC or firm. As currently written, details in the bill are quite vague and seem unrealistic; nevertheless, the bill was introduced with 16 democratic sponsors as part of a package of labor-oriented legislation, which also includes restrictions on non-competes.
Reporting of misclassification would be encouraged by HB4391
As part of the same package of legislation, HB4391 would create requirements for the state to provide an instruction with each state income tax return explaining the new independent contractor requirements and rules. It would also require Michigan’s Department of Treasury to send a notice to each person listed on a Form 1099 explaining the independent contractor law. The intent is to encourage workers to report alleged misclassification.
Legislation on this topic is pending as well in several other states. As part of my law practice, I monitor such ongoing legislation and regulation for a number of national AMCs and firms.