TRIPLE JEOPARDY: Misclassification Doesn’t Just Cost Workers Wages, It Robs Government of Revenue and Local Business of a Chance to Compete
There is an epidemic in the United States, a disease coursing through the veins of the American workforce. It has not been contracted by neglect, but by willful deception. It is worker misclassification.
It is a problem that is finally gaining a bit of attention with more and more workers being incorrectly labeled “independent contractors” in order for employers to avoid providing healthcare, to skirt prevailing, overtime and holiday wages, and to shift the burden of paycheck taxation to the employee.
Not only the worker suffers from being misclassified, however. The government, too, bears the burden of sprawling independent contractorship in the form of lost tax income when workers don’t file properly or, in some cases, at all. Further, nearby businesses who play by the rules are at a severe disadvantage when their rivals are slashing costs by remorselessly cheating the system. The problem became so prevalent in the first decade of the new millenium that the U.S. Department of Labor has pivoted to stronger crackdown measures in 2011.
Misclassification has long been rampant in the construction and skilled trades sector, partially due to the high percentage of immigrant workers in the industry, but the practice is becoming commonplace in many other sectors as well. CBS News recently ran a story on a seven-year commercial trucking vet named Dutch Prior who, after being hired by Shippers Transport Express last year, began to be paid as an independent contractor. His misclassification has lead to nothing but uncertainty and exploitation, according to the CBS piece:
“I’m not classified as an employee,” Prior said. “I’m classified as an independent contractor, but I have very, very little control over the success or failure of my company.”
Despite his so-called independence, Prior works exclusively for Shippers Transport, which doles out his daily routes. He has seen his paychecks dwindle, and he has none of the protections he would get as an employee.
“As long as we are independent contractors (the company) doesn’t have to cover benefits, they don’t have to cover sick days, bereavement leave time, holiday pay. It just saves the company money.”
Labor Secretary Hilda Solis has spent 2011 making misclassification a top priority of the Labor Department. “Iin 2011,” the CBS story continues, “the department collected more than $5 million in back wages on behalf of about 7,800 employees who had been misclassified – a 500 percent increase over the amount collected in 2008. They have hired 300 additional investigators to probe complaints.”
The problem effects more than the workers who are being treated unfairly. By shifting the burden of tax filing entirely to the workers, companies that misclassify workers are often cheating the government and rival businesses:
“These have astronomical impacts on local governments, state governments and federal government and also hurts good, legitimate businesses that are playing by the rules and for employees that are being ripped off,” Secretary Solis said.
A Florida website, FLWageLawyers.com, provides clarification for those wondering if they are being improperly classified by their employer:
Just because an employer calls you a “subcontractor” doesn’t make it legal. Every case is different, but one factor courts look at is how much control your boss has over your work. If your only job is working for a single boss, and he or she directs your job (hours, schedule, pay, etc.), you may be improperly classified. Many employers misclassify their employees as independent contractors to cheat on their taxes or to avoid paying overtime wages for hours worked over forty in a workweek.
Employers are fighting back, saying that they are not misclassifying workers and that workers instead want to be misclassified:
Bob Digges, of the American Trucking Association, says many truckers choose to be independent contractors, instead of employees.
“Trucking companies are not misclassifying workers, Digges said.
“They believe they get a more productive employee – excuse me a more effective worker – a worker who is efficient, who has some skin in the game.”
In 2011, it is hard to imagine an employee foregoing health benefits, overtime and holiday pay just to avoid paying taxes. This is at best a draw in terms of income retention but creates great risk with potential IRS fines for law-breaking and the insecurity that comes with lack of health coverage.
So what are states doing to address the problem? A lot, it appears. Here is a look into the laws, actions and cases popping up in a smattering of states around the country
The problem of worker misclassification has grown so rapidly that Governor Jerry Brown has recently signed two bills into law to address it. According to Construction Citizen, the two bills are SB 459 and AB 469:
SB 459 directly impacts employers that classify workers as independent contractors. This bill imposes steep civil penalties ranging from $5,000 – $25,000 per incident with the upper levels reserved for those firms that exhibit a pattern of violations. Additionally the penalties include the posting on the company’s website of a statement saying that they have been found guilty of a “serious violation of the law”. These and other penalties are included in this law designed to better control the use of the 1099 or independent contractor as a way to avoid paying workers as employees and thereby avoiding the state and federal taxes, overtime and benefits normally paid by responsible contractors in the state.
The second is AB 469, also known as the Wage Theft Prevention Act of 2011 (WTPA). One of the requirements of AB 469 is that “as of January 1, 2012, certain employers must provide each new non-exempt employee with a written notice at the time of hiring, in the language that the employer normally uses to communicate employment-related information, which contains the following:
1. The employee’s pay rate or pay rates, and basis thereof, whether paid by the hour, shift, day, week, salary, piece, commission, or otherwise, including any overtime rates, as applicable;
2. Allowances included as part of the minimum wage calculation, including meal or lodging allowances;
3. The employer’s regular payday;
4. The employer’s name, including any “doing business as” names;
5. The employer’s physical address of its main office or principal place of business, and a mailing address, if different;
6. The employer’s telephone number;
7. The name, address, and the telephone number of the employer’s workers’ compensation insurance carrier; and
8. Any other information the California Labor Commissioner deems material and necessary.
Both of these laws aim to protect workers from payroll theft, abuse and mismanagement. As a result, 2012 could be the fairest year on record in California.
A bill similar to California’s is desired by the state of Texas which has seen the problem of misclassification escalate enough to demand action from both sides of the political aisle. Although they have not yet joined the other 14 states actively working with the Department of Labor, Texas is looking to make misclassification reforms across a wide span of industries. With a massive immigrant population and a disproportionate percentage of undocumented workers, misclassification is a pressing issue in the Lone Star State.
Recently, the problem has seeped its way into car dealerships where workers are being misclassified as independent contractors to skirt local laws and regulations.
Misclassificaton has been plaguing Massachusetts, but back wages have also been delivered in several instances recently. Two Massachusetts trucking companies have reached a settlement agreement with the Fair Labor Division of the Attorney General’s Office in order to resolve a wage and hour lawsuit by paying over $225,000 in vacation back wages to 170 former employees. According to the Bureau of Labor Statistics (BLS), the Bay State also recently ordered three masonry companies to pay $68,000 in back wages. The find came during a site inspection:
During site inspections at nine public construction projects, investigators of the AG’s Fair Labor Division filmed employees performing masonry tasks, such as cutting block or brick with a masonry saw. Payroll records revealed that the masonry workers were misclassified as laborers and were therefore denied prevailing wages for their trade.
In 2008, MA Governor Deval Patrick issued an executive order which formed the Joint Enforcement Task Force on the Underground Economy and Employee Misclassification. According to Mass.gov, the Executive Order calls for the Task Force member agencies to address the underground economy cooperatively based on the following objectives:
•Educate business owners and employees about applicable requirements
•Conduct joint, targeted investigations and enforcement actions
•Protect the health, safety, and benefit rights of workers
•Restore competitive equality for law-abiding businesses
The Commonwealth of Pennsylvania also has passed new laws to combat employee misclassification, raising fines and penalties for employers caught in the act. PA’s law aims to define who can be labeled as an independent contractor:
Individuals only will be deemed to be engaged in an independently established trade, occupation, profession or business in the commercial or residential building construction industry if they:
• Possess the essential equipment needed to perform such service,
• Realize a profit or loss from performing the service,
• Perform the service through a business in which they have a proprietary interest,
• Maintain a location separate from the person for whom the services are being performed,
• Maintain $50,000 liability insurance, and
• Previously performed similar services for another while free from their direction and control or holds themselves out as available to and performs the same services while free from direction and control.
Colorado recently became the 11th state to join the Labor Department in its fight against misclassification. Colorado is a prime example of an economic situation where employers can easily take advantage of laborers by misclassifying them. The area’s real estate market was decimated through the second half of the past decade leaving many skilled workers unemployed. The few jobs available go to the workers willing to do the work for the smallest return. This can lead to situations where carpenters can be paid $10 an hour as a general laborer. The going rate for this work can be two, three or four times this amount. Further, contractors who seek out people willing to be exploited have an unfair advantage over contractors who comply with the law:
Ellen Golombek, executive director of the Colorado Department of Labor and Employment signed a memorandum of understanding this morning with Nancy Leppink, head of the U.S. Department of Labor’s Wage and Hour Division.
“Misclassification costs everyone,” Golombek said. “It destabilizes the business climate by causing responsible businesses to suffer unfair competition.”
Employers who treat their workers as independent contractors when they should be employees can gain an unfair advantage over competitors following the rules and paying payroll taxes.
Workers who are misclassified can be denied access to benefits and protections including family and medical leave, overtime, minimum wage and unemployment insurance, the Labor Department said.
The State of Illinois passed a worker misclassification law in 2007 that has resulted in some success. Illinois is another state in which the 1099ing of employees goes beyond the construction trades. One year ago, the law helped reform misclassification abuses towards Chicago cable installers. As the Chicago Tribune reported, cable installer Joe Marte was being simultaneously labeled an employee and an independent contractor so that he could not be classified as full-time and therefore could not receive benefits or overtime pay:
“They had said we’re supposed to be employees, but they still wanted to pay us as independent contractors,” Marte said. Independent contractors, who are considered sole proprietors, get 1099 tax forms instead of W-2s.
Marte, who got two forms of payment for the work he did, is now unemployed and suing the company for misclassifying him and not paying overtime, said Maureen Bantz, an associate attorney at Werman Law Office in Chicago, which is handling his case.
“We’re alleging they’re a single employer for the purposes of overtime even though they are separate entities on paper,” Bantz said.
The Illinois General Assembly also passed a budget bill late last month that gave the IL Dept. of Labor an additional $609,000 for their budget specifically to use for misclassification enforcement.
In the State of New York, misclassification has become a problem in the restaurant industry. This is perhaps predictable for the nation’s restaurant capital, but claims that 95% of Brooklyn establishments feature misclassification are nonetheless alarming:
James A. Parrott, deputy director and chief economist for the Fiscal Policy Institute in New York, said that recent significant increases in New York’s restaurant employment may have been driven by the state’s enforcement sweeps that have targeted the industry.
“It was found that about 95 percent of restaurants in Brooklyn have some kind of misclassification,” Parrott said.
“Employers are now putting them on the books because of the enforcement action,” resulting in a 10 percent increase in reported restaurant employment, he said.
Getting saddled with unexpected taxes come April can put real and damaging pressure on employees that an employer’s infrastructure is more well-suited to manage:
Parrott said New York’s enforcement data gathered from September 2007 through the end of March 2010 begins to demonstrate the extent of employee misclassification. A New York Joint Enforcement Task Force on Employee Misclassification conducted some 67 sweeps across the state that identified nearly 35,000 cases of employee misclassification and discovered more than $457 million in unreported taxes, more than $13.2 million in unemployment insurance taxes due, and more than $14 million in unpaid wages, he said.
According to the National Employment Law Project (NELP), more than half of those 35,000 cases took place since 2010:
In the past year, the Joint Enforcement Task Force on Employee Misclassification (JETF) identified over 18,500 instances of employee misclassification, discovered over $314 million in unreported wages, assessed over $10.5 million in unemployment taxes, over $2 million in unpaid wages and over $800,000 in workers’ compensation fines and penalties.
The state of Maine created their own Joint Enforcement Task Force on Employee Misclassification by executive order in 2009. Since then, the state has defined specific cases in which workers can be classified as independent contractors, specifically in the trucking and messenger service industries. The law has been used as a model for states looking for new ways to battle their own misclassification problems.
Unfortunately, under the reign of Tea Party favorite Governor Paul LePage, Maine has seen its efforts to battle this problem undermined. More from NELP:
In January, Governor LePage signed an executive order abolishing the state’s task force, created in 2009 to study worker misclassification and discourage employers from misclassifying employees as independent contractors. The order states “there is no need for a task force, an extra layer of bureaucracy,” and that the “existence of a task force… has created uncertainty within the business community.
On southern soil, employers who have misclassified workers are being given a bit of a gift. They can “turn themselves in” before being caught and punished thanks to the Voluntary Classification Settlement Program (VCSP), a sort of amnesty program which may offer relief from unpaid employment taxes, penalties, and interest resulting from worker misclassifications. The VCSP was created by the IRS to help employers who want to go legit.
Connecticut created a Joint Enforcement Commission for Worker Misclassification in 2008. The state has since used its six member Employee Misclassification Advisory Board, comprised of labor and management leaders, to pass sweeping reforms and enforce new laws. The state recently cracked down on building contractors misclassifying workers to avoid paying proper overtime:
“The Wage and Hour Division is employing new strategies to combat this ‘race to the bottom’ culture so that construction workers will not see their wages and benefits undercut, and law-abiding employers will not face unfair competition from contractors who take advantage of workers so eager for a job that they will accept substandard wages and unsafe conditions,” said Neil Patrick, the division’s Hartford district director.
According to NELP, the DOL has been busy in Connecticut this year:
The Department of Labor issued 23 Stop-Work orders against subcontractors working on a $26 million HUD project after finding that the firms had misclassified their employees and failed to have adequate workers’ compensation insurance.5 In the fiscal year ending June 30, 2011, the CT DOL issued a total of 159 Stop-Work orders to employers who did not comply with the state’s workers’ compensation laws.
These discrete state-level attempts to corrale unscrupulous employers are encouraging, should be celebrated and provide a solid framework for moving forward, but misclassification has spun so wildly out of control that increased pressure is as necessary as ever. Misclassification is both exploitative of workers and hurts government. It also cheats local businesses and state economies. It is the kind of triple jeopardy that no individual or municipality can withstand in this economy. Misclassification effects our neighbors, our friends and our families by taking advantage of people unwilling to complain about their rights for fear of returning to the never-ending job hunt. And who can blame them? Being misclassified beats the pants off not being classified at all.