Unfortunately, some unscrupulous contractors around the country are misclassifying their workers as "independent contractors" in an effort to cut costs. This illegal practice is leaving honest, law abiding contractors at a huge competitive disadvantage.
On March 27, the House Education and Labor subcommittee held a hearing on this crucial matter. In her opening statement, Rep. Lynn Woolsey (D-CA), chairwoman of the subcommittee, stated, "The practice hurts everyone: workers who are not afforded the protection of labor laws; honest contractors who can't compete with contractors who misclassify their workers in order to lower their costs; and all of society, as state and federal governments lose millions of dollars in revenue each year."
Woolsey continued: "The U.S. Department of Labor has stated that the number-one factor for employers in misclassifying workers is the desire to avoid paying workers' compensation premiums and to otherwise avoid workplace injury and disability disputes."
The construction industry has faced this problem for years; however, recently this problem has reached epic proportions. Contractors who are intentionally misclassifying their workers as independent contractors avoid payments to the state workers' compensation fund, unemployment insurance and Medicare.
Cliff Horn, president of A. Horn Inc., testified before the subcommittee on behalf of the Mason Contractors Association of America (MCAA) regarding the impact this illegal practice is having on the masonry industry, as well as the construction industry as a whole. During his testimony, Horn told the subcommittee, "Businesses that misclassify employees as independent contractors can expect to reduce their labor costs between 15 to 30 percent. This places contractors like myself at a competitive disadvantage in an industry with 20-percent gross margins.
"The misclassification of workers has impacted my business, and is impacting the construction industry at the local, state and federal level," Horn continued.
During his testimony, Horn also highlighted the fact that there are legitimate, independent contractors in the construction industry and that "it was not his intention to undermine those sole proprietorships and small businesses."
"The problem is the intentional misclassification of individuals who are in fact employees, but are classified as independent contractors by unscrupulous employers," Horn said.
John Flynn, president of the International Union of Bricklayers and Allied Crafts (BAC) also testified before the subcommittee. Flynn commented in his testimony that "by misclassifying employees as independent contractors, unscrupulous employers avoid labor and employment laws, prevailing wage laws, and other legislation intended to ensure that workers are dealt with in a fair and equitable manner."
The Subcommittee on Workforce Protections determined this issue was worthy of Congressional action after numerous problems began appearing across the country. In Illinois, where Horn's company is based, state and federal agencies are investigating allegations that some Chicago area construction companies are deliberately misclassifying workers as independent contractors, illegally boosting company profits and depriving the state and federal government of millions of dollars in tax revenue.
The University of Missouri-Kansas City's Department of Economics recently released a report estimating that, in Illinois, $124.7 million in income tax was lost annually from 2001 through 2005, and $8.9 million a year was lost in the construction sector alone because of misclassification. The report also estimated that, on average, $95.9 million annually of workers' compensation premiums went unpaid for misclassified workers it is estimated that construction industry employers accounted for $23.2 million of this amount.
Horn also demonstrated in his testimony that, in addition to depriving workers of their legal rights and the government of payroll taxes, these employers raise safety and health issues by not paying workers' compensation premiums. "If some contractors are skirting around workers' compensation, then the firms who properly classify employees are forced to carry the load," he said. "If workers' compensation is unavailable to a worker, then our healthcare system has to absorb the cost."
Although this practice is a problem in the construction industry, it is not confined to the building trades. Catherine Ruckelshaus, an attorney with the National Employment Law Project in New York, testified that she has worked on cases across the country involving misclassification of workers. In particular, Ruckelshaus described a case in New York that involved delivery workers for a grocery chain, where the workers were misclassified as independent contractors and paid $90 a week, despite working full-time. As a solution to the problem, Ruckelshaus urged better and more coordinated enforcement by the Department of Labor's Wage and Hour Division and the Internal Revenue Service to crack down on employers that misclassify workers to evade federal wage and overtime laws, as well as payroll taxes.
Rep. Tim Bishop (D-NY) remarked that state laws in Massachusetts and New Mexico presume an employer-employee relationship, and asked if that would work in the construction industry. Ruckelshaus responded, "If it's at the state level, it can work very well." However, she continued, she "was unsure how such a presumption would work at the federal level." Ruckelshaus again emphasized that federal agencies need to improve enforcement of current law. Making the Labor Department's efforts "more strategic and more targeted" is essential, she said.
Rep. Tom Price (R-GA) asked Horn if Congress needed to clearly define the distinction between independent contractors and employees. "A lot of the rules are in place; they just need to be enforced." Horn replied. "More education for workers on the issue also might be helpful. Employers are well aware when they are doing something wrong."
Woolsey concluded the hearing stating that members of the subcommittee will be sending a letter to the Department of Labor requesting details on its current enforcement efforts. She added, if the subcommittee is dissatisfied with the department's response, oversight hearings would follow.
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