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Jul
2012
31

REPORT: Misclassification Allows Subcontractors to Shave 26% off Payroll on the Backs of Workers

According to Virginia’s new General Assembly Joint Legislative Audit and Review Commission (JLARC), the misclassification of construction workers as “independent contractors” is a problem that affects workers, business people, and the commonwealth alike. This is by no means breaking news to those in the know, but the problem is often downplayed, overlooked, or simply not elucidated enough for laymen to grasp its severity. In a big misclassification exposé on this site we highlighted its “triple jeopardy” effect.

When subcontractors purposefully label employees as independent businesses or “independent contractors,” they ignore payroll taxes, withholding, workers’ compensation premiums and unemployment insurance taxes. According to the JLARC, this form of payroll fraud allows subcontractors to reduce their payroll costs by nearly 26 percent, creating an unfair advantage in bidding against law-abiding construction companies.

Brian Burns, CEO of Dynalectric Company in Sterling, Virginia, recently took to the pages of the Richmond Times-Dispatch calling for the Virginia Legislature to make the changes deemed necessary by the JLARC to combat this epidemic within the construction trades. Burns writes that no one but the subcontractor getting away with fraud is a winner when it comes to misclassification:

Not only does misclassification of workers hurt our ability to run our businesses and create jobs, but the JLARC report estimates that state revenue losses are as much as $28 million a year. In addition to the loss to the general fund, the Virginia Employment Commission loses tax revenue, while workers’ compensation premiums go up for the rest of the business community who must foot the bill for uninsured employers. (The Workers’ Compensation Commission states that the volume of misclassification noted in the JLARC Report is understated). Obviously, many legitimate independent contractors work in the construction industry. However, when there are 20, 30 or 50 people hanging sheetrock at a school or hospital project, those people are employees of the subcontractor — not independent business owners. The JLARC report concludes that most misclassification is intentional, not the result of confusion about the definition of “employee.” There is a huge financial incentive for unscrupulous construction subcontractors to claim that their workers are “independent contractors.”

Burns notes that Louisiana, Florida, Oklahoma, Tennessee, Utah and Nebraska have all enacted such legislation to protect and support legitimate businesses in their states. He strongly urges Virginia Governor Bob O’Donnell to enact the JLARC’s proposal of creating a coordinated agency approach between the Department of Taxation, the Virginia Employment Commission, the Department of Labor and Industry, and the Virginia Workers’ Compensation Commission to combat the problem. On their own, none of these agencies have the resources to battle the enormity of the problem:

The governor and the General Assembly are urged to make the JLARC findings and recommendations a top priority, and to support those of us in the Virginia construction industry who abide by the rules and are now paying a stiff price for doing so. Until this is done, legitimate businesses and the taxpayers will be footing the bill for those who are currently abusing the system.

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