Crackdown on misclassified workers

LINCOLN — Jim Steele said it's happened more than once.

The drywall company he works for submits a bid on a project, and it comes in pretty close with several other competitors.

After all, Steele said, there are only so many ways to hang “rock,” and just about everyone has about the same expenses.

But then one company's bid comes in like a “torpedo” — 30 percent below the others.

That firm gets the job; the others walk away, shaking their heads.

“We all wonder how in the heck did they do that?” said Steele, safety director for Falewitch Construction Services of La Vista.

The answer, Steele and some state officials believe, is how some companies classify their workers.

By deeming workers independent contractors rather than employees, a company can avoid paying as much as 30 percent in labor costs.

Company expenses such as workers compensation insurance, unemployment insurance and Social Security taxes, which are paid for regular employees, aren't necessary for independent contractors.

The practice gives employers an unfair advantage in getting jobs over those who “play by the rules,” said State Sen. Steve Lathrop of Omaha.

“The honest contractors are having a difficult job competing,” he said.

Lathrop is preparing legislation for the 2010 session that would increase enforcement and clamp down on contractors who “misclassify'' workers.

The goal is not only to level the playing field for companies but to go after uncollected taxes, which could total as much as $20 million a year in Nebraska.

Tougher enforcement, proponents say, might also close an avenue some use to get around background checks for undocumented workers.

The issue is getting attention nationwide.

As states struggle with revenue shortfalls in the tough economy, they are seeking more revenue sources to finance government operations, particularly those that don't require higher taxes.

While some officials dispute how much uncollected tax revenue is out there, some of the estimates are eye-opening.

In Colorado, for instance, officials have estimated that $40 million a year in taxes is not being paid because employees are classified as independent contractors. In Missouri, the tax loss is projected at $28 million.

While Nebraska has not yet studied how much tax money it is losing — state revenue officials say they can't easily provide an answer — a similarly sized state, New Hampshire, estimated that it loses about $20 million.

One report in 2000 estimated that there were more than 9,000 workers classified as independent contractors in Nebraska.

Whatever the tax losses, Nebraska is among at least 28 states looking at the issue. Some have already stepped up enforcement. Neighboring Kansas has established a task force to track down the tax dodgers.

Last month, attorneys general in Montana, New York and New Jersey said they plan to sue FedEx Ground, claiming that the company's use of independent contractors to ship packages is illegal and denies workers their rights and benefits.

“States are scrambling for revenue, and this is one place to find it. That's why states are taking a hard look at this,” said Dave Wilson, a regional organizer for the Carpenters Union. That union, along with the Teamsters, is lobbying for a crackdown on the practice.

The issue is not new to Nebraska.

In a series of 2003 articles, The World-Herald reported how independent contractors, many of them illegal immigrants, were used to help build the Qwest Center Omaha and other projects. Last spring, Tufly Commercial LLC of Omaha was fined $150,000 in U.S. District Court for employing undocumented immigrants on a federal project in Omaha.

Lathrop said that with the new “E-Verify” system and other ways to check the immigration status of workers, one way employers can slip undocumented workers onto a job is by classifying them as “independent contractors” to avoid such background checks.

The Legislature took one step last spring to address the abuses, passing a law that makes it criminal insurance fraud for an employer to willfully misclassify a worker to escape paying workers compensation insurance fees.

But enforcement remains a problem.

Doug Ewald, State Revenue Department director, said his agency doesn't have the expertise to track down offenders and leaves enforcement to federal authorities.

Steele, the La Vista drywall company worker, said independent contractors often are paid slightly more than other workers because the company has fewer expenses in employing them. So, he said, the workers have no incentive to complain.

Ewald said the federal government recently announced that it will audit 6,000 companies after Jan. 1 to see if they are complying with worker classification laws.

He said one hurdle to enforcement is the inability of the Revenue and Labor Departments to share information, due to privacy laws. Ewald said legislation to remedy that will be introduced next month.

Lathrop questioned how seriously the Revenue Department takes the matter.

He said he has asked the department for an estimate on the extent of the problem in Nebraska and has been put off repeatedly. Last month, Lathrop pressed Ewald for an answer during a public hearing. Ewald said the quickest his department could provide an answer would be next summer.

Ron Sedlacek, an attorney for the Nebraska Chamber of Commerce and Industry, said it's difficult to estimate how much in taxes may be going unpaid, because independent contractors themselves are supposed to be paying taxes on their wages.

Sedlacek said his organization also is concerned about the multiple definitions used by various government agencies to determine who is and isn't an independent contractor.

Most definitions hinge on the amount of control and direction a company exercises over workers in determining if they should be classified as employees, with full company benefits, or as independent contractors.

Lathrop said the bill he is drafting seeks to clear up any problems in defining independent contractors and will provide a hot line for workers and employees to report abuses.

He said he also wants to exempt industries like trucking, where the use of independent contractors is a longtime practice.

Contact the writer:

402-473-9584, paul.hammel@owh.com

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