Tag Archives: misclassification

Misclassification: Cheating the System in North Carolina

A yearlong McClatchy public-records investigation of government construction projects spanning 28 states discovered widespread misclassification of construction workers as independent contractors instead of employees (News & Observer, September 8, 2014). By misclassifying their employees, construction companies were able to undercut their law-abiding competitors while at the same time exploiting those desperate for work. As a result, the study found that North Carolina loses approximately $467 million per year in tax revenue from construction firms and their employees.

Such a scam is simple. Companies declare that hourly wage earners working for them are independent subcontractors, not employees. These companies do not withhold income tax or file payroll taxes on those workers. They also do not pay unemployment tax and are not required to provide workers’ compensation insurance. Thus, there is less paperwork and more profit for the companies. The McClatchy investigation estimated that these companies can save 20% in labor costs by treating employees as independent contractors.

Misclassification has far-reaching effects. The investigation discovered that these cheaters:

(1)    ignored existing labor laws and the IRS by misclassifying employees;

(2)    undercut the bids of law-abiding companies;

(3)    cheated workers by eliminating unemployment insurance, workers’ compensation coverage  and social security payments;

(4)    benefited from lax government officials who could have stopped them.    

Misclassification – Department of Labor Recovery

United States Department of LaborThe U.S. Department of Labor has recovered more than $1 million in back wages and liquidated damages for 196 employees of Bowlin Group LLC and Bowlin Services LLC out of Ohio and Kentucky. Bowlin Services installed cable for Insight Communications, a cable, telephone and Internet provider in Kentucky. The defendants misclassified 77 employees as independent contractors and violated the Fair Labor Standards Act (FLSA) by denying these workers access to critical benefits, including minimum wage, overtime, family and medical leave, unemployment insurance, workers’ compensation and failing to maintain accurate payroll records.

Misclassifying employees negatively impacts our economy, generating losses to the U.S. Treasury, Social Security and Medicare funds, state unemployment insurance, and state workers’ compensation funds. It also leads to unfair competition because businesses that play by the rules are at a disadvantage.

This problem has become so acute in Tennessee that last month the legislature passed Senate Bill 833, which has been signed into law and imposes penalties on construction companies for misclassifying workers in an attempt to evade workers’ compensation premiums. A Tennessee study in 2012 revealed losses of up to $91.6 million in workers’ compensation premiums. North Carolina has identified the problem but has yet to take any action. Until states aggressively prosecute misclassification, this fraud will continue.

Wacky Worker’s Comp Week. Stripper Denied Worker’s Comp Benefits

The South Carolina Supreme Court found that an exotic dancer was an “Independent Contractor,” not an employee.

Today’s post comes from guest author Tom Domer from The Domer Law Firm.

What a wacky week in the world of worker’s compensation.

We found that a stripper who was seriously injured by a bullet fired at the club where she was working was not entitled to worker’s compensation benefits because the South Carolina Supreme Court found she was not an employee, but rather a “Independent Contractor.” She had serious intestinal, liver, pancreas, kidney, and uterus injuries, and had her kidney removed – which rendered her unemployable as an exotic dancer. She claimed she was an employee because the club controlled her activities, including telling her when to dance, what music to dance to, and required her to strive to get VIP dances.

In Wisconsin, an employer’s inclination to mis-categorize an employee as an “Independent Contractor” can be tempting: avoidance of payment of worker’s or unemployment compensation premiums, payroll and Social Security taxes, and other employee benefits.

The Court of Appeals disagreed, indicating she decided the manner in which she performed her dances to satisfy the Boom Boom Room Club customers. In Wisconsin, an employer’s inclination to mis-categorize an employee as an “Independent Contractor” can be tempting: avoidance of payment of worker’s or unemployment compensation premiums, payroll and Social Security taxes, and other employee benefits. For many years the Courts and the Commission wrestled with the legal distinction between Independent Contractors and employees. Workers who maintained a separate business and held themselves out to render service to the public were Independent Contractors, if not employers themselves; all other workers were employees.

The legislature clarified the test for determining Independent Contractors status, indicating an Independent Contractor must maintain a separate business with his or her own office equipment, materials and other facilities, and hold or apply for a Federal Employer Identification Number. Seven other specific criteria apply. Any single criterion that rules out many Independent Contractors like the absence of a Federal I.D. Number or filing self-employment tax returns makes alleged “Independent Contractors” employees and covered under worker’s compensation in Wisconsin. Many employers including trucking companies, temporary help agencies, and up to and including exotic dancers are asked to sign Independent Contractor contracts when in fact they really are employees under worker’s compensation.

Misclassification Task Force Has First Meeting

Wayne Goodwin

North Carolina Commissioner of Insurance Wayne Goodwin

Wayne Goodwin, the North Carolina Commissioner of Insurance, held the first meeting of the Governor’s Misclassification Task Force on September 20, 2012 in Raleigh. Commissioner Goodwin set the tone for the meeting by saying that the purpose of the Task Force was to solve a serious problem but not to get into fiinger pointing. He expects to issue a report early next year and will hold at least two other meetings to gather information.

Elaine Marshall, Secretary of State, and Pamela Young, Chair of the Industrial Commission, were present along with representatives from the Sheriffi’s Association, Public Safety, the Attorney General’s office, the Department of Labor, and the Administrative Office of the Courts. After taking several questions from Task Force members, Commissioner Goodwin recognized Carol Brooke and Harry Paye of the North Caroina Justice Center, who discussed statistics related to the significant number of misclassified employees who have been discovered in other states. Milions of dollars in revenue, unemployment insurance and workers’ compensation insurance premiums have not been paid as a result of improperly classifying employees as indepednent contractors.

Doug Burton, the owner of a masonry company, addressed the Task Force and told of the widespread problem in his industry and how it is getting worse, which means that those employers who are abiding by the rules and deducting proper taxes are losing out on jobs to those who cheat the system. As a competitor told him recently: “The best thing to ever happen to my business was getting rid of all my employees.” The Task Force will look into a possible ban on “ghost policies” and possibly recommend a statutory definition of “independent contractor.” It will look at how state agencies can share data to identify misclassified employees. The next meeting will probably be in November but no date has been set.

Misclassification Fraud Across the Country

Governor Bev Perdue“Misclassification” is a poorly chosen word to describe fraudulent conduct by employers who misclassify the status of their employees. For example, a roofing company may have 30 roofers doing the actual work but these workers are classified as “independent contractors” instead of employees. Why would they do that? At the end of the year these workers are sent a 1099 tax form that reports the wages paid, but the employer does not make any deductions for Medicare or unemployment, and doesn’t pay for workers’ compensation insurance. If you have a roofing company and you properly classify your employees, you are at a competitive disadvantage in bidding on jobs. Honest businesses are hurt by misclassification, and taxpayers are hurt because they pick up medical bills and other expenses created when one of these “independent contractors” gets hurt.

Another form of misclassification is when a construction company with 85 employees reports to its workers’ compensation insurance company that 75 of these people are staff workers, which results in a significantly reduced premium. Obviously, a construction worker is at greater risk of injury than an office worker. Again, the honest company who accurately reports the status of its employees is at a competitive disadvantage with the dishonest employer.

New York, New Jersey, Massachusetts, Virginia, Michigan, Florida, California, Texas and the vast majority of states across the country have been looking into this issue for several years and they have been aggressively prosecuting dishonest employers who try to game the system. North Carolina has finally joined these states. On August 22, 2012, Governor Beverly Perdue issued Executive Order 125, which created a task force to study this issue and try to get different agencies to communicate with each other and share information to identify employers who are failing to pay employee taxes. Hopefully, this task force will figure out how to enforce existing law. This blog will follow the progress of this task force. Stay tuned.

Corrupt Employers Just Keep Cooking the Books

As you have seen me mention several times on this blog, the failure of many employers to play by the rules continues to plague the nation’s workers’ compensation system. In one type of fraud, known as misclassification, employers incorrectly designate workers as outside consultants or independent contractors.

When workers are misclassified, insurance companies do not consider them employees. The injured workers are then denied workers’ compensation benefits. Additionally, the insurance companies are not paid insurance premiums and are not adequately reserved for the risk of injury by those workers.

The following video excerpt is of an interview I did a while back with Sam Gold, director of the National Association of Injured Workers (NOIW) and producer of Injured On The Job. We discuss this continuing problem and the need for it be addressed by regulatory agencies so that workers’ and their families are protected from fraudulent employers.

How Employer Fraud Is Destroying Our Middle Class

Last September I invited Dan Reilly from the Teamsters to give a continuing legal education talk at the annual conference of the Workers’ Injury Law & Advocacy Group. Dan presented on the topic of employer fraud, and in particular on an increasingly common practice known as misclassification. The video above is just a short clip from an interview we did after his talk. I’ll continue to share more clips from our fascinating conversation on this blog from time to time.

These workers have no benefits, and none of the protections that they should legally have. They simply do not have a safety net.

The term misclassification sounds innocent enough, but in reality it is a growing practice of exploitation that is taking away the rights of working people all across the United States.

Companies like FedEx “misclassify” workers who do the same jobs that full-time employees do by calling them independent contractors. This practice saves companies significant amounts of employee-related costs such as health care, workers’ compensation, unemployment taxes and other benefits.

What misclassification means for these independent contractors is up to 25% less salary than Continue reading