The Texas Workforce Commission (TWC) is considering interagency collaboration to step up enforcement of worker misclassification violations in Texas, a point they discussed in a meeting with construction industry leaders in December.
Misclassification occurs when employers wrongfully identify their employees as independent contractors by providing them with a 1099 form instead of the W-2 for employees or by paying wages in cash and failing to withhold taxes. By misclassifying their workers, unscrupulous employers cut their costs by getting out of paying payroll taxes and fraudulently obtaining workers compensation policies for fewer workers than they actually employ.
When government agencies such as the TWC, the Texas Department of Insurance (TDI), the Texas Comptroller of Public Accounts and the Attorney General of Texas share information, they can improve enforcement efforts by identifying likely violations for more effective investigations. They can specifically target industries such as construction where misclassification is especially rampant and there is a greater need for their attention. (A recent study by the University of Texas found that 38% of construction workers in Austin are misclassified.)
Many states have already established such interagency task forces to combat misclassification and payroll fraud. The thirteen states which have legislation creating enforcement task forces are California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, Michigan, New Hampshire, New Jersey, New York, Oregon, Utah and Vermont. Louisiana and West Virginia have assembled task forces without legislation. Ten other states have task forces to study misclassification and make recommendations to their state legislatures including Iowa, Louisiana, Nevada, Rhode Island, West Virginia and Wisconsin. Hawaii currently only has a study task force, but has legislation indicating that an enforcement task force will follow. Washington’s study task force recommendations have already resulted in enforcement legislation. Minnesota and Tennessee’s misclassification study task forces specifically target the construction industry. Indiana has legislation requiring agencies to share information regarding misclassification in the construction industry, which ultimately aids enforcement.
Efforts to block misclassification have resulted in considerable revenue for states. Examples of money states have recovered include:
- Iowa: Between July 2009 and November 2009, the misclassification unit found 45 employers identified who misclassified 178 workers with unreported wages totaling $2,621,115. Total unemployment taxes due is $112,253; penalties/interest due is $24,246; and the average unreported wages per worker is $14,725, according to the minutes from the November 12, 2009 meeting of the Iowa Workforce Development Board.
- Massachusetts reports that its Joint Enforcement Task Force recovered more than $6.4 million in taxes, wages, and fines in 2010 ($2,071,211 in new unemployment insurance taxes).
- California’s Employment Development Department between 2005 and 2007 recovered a total of $111,956,556 in payroll tax assessments, $18,537,894 in labor code citations, and $40,348,667 in assessments on employment tax fraud cases.
If the TWC, TDI, Comptroller, the AG and other groups decide to set up interagency collaboration, either with or without legislation, it will be an important step in the fight against misclassification in Texas. With the state facing a $15-27 billion shortfall for the coming budget cycle, Texas cannot afford to overlook this important loss of income.