Far too often, construction companies cheat taxpayers and their workers by pretending their employees are independent subcontractors when, by law, they should be paid as employees. It’s a practice known as worker misclassification. Some ethical contractors have called it a “cancer that is eating at the heart of our industry.”
If a person is paid as a subcontractor, that individual is on the hook for payroll taxes and benefits like health insurance. When they’re injured, uninsured workers are often dropped off at county hospitals and the rest of us end up paying more in health costs and local property taxes.
In Construction Citizen’s Special Report, “Thrown Away People,” our team outlined many of the problems presented to society by the degradation of the employer – employee relationship. The McClatchy Newspaper chain this year followed up with a powerful series called “Contract to Cheat,” which took another in-depth look at the problem.
Companies that skirt the law in this way can fraudulently cut their labor costs by as much as about 30 percent. Firms that are playing by the rules are at a competitive disadvantage because they’re investing in the workforce while bandits make a mockery of the rule of law. This happens in other industries as well, but it is especially rampant in construction.
The Dallas Morning News editorial board has said taxpayers should be incensed about the way some of these construction companies operate:
“If you think this isn’t your problem, think again. Injured workers end up in hospital emergency rooms for treatment on the taxpayer dime or out of work with no place to turn for the medical treatment that would allow them to return to work. Guess who picks up the costs? You do, either in public assistance or in the loss of millions of dollars in unpaid payroll taxes skirted by companies intentionally misclassifying workers.”
The first of what could be several bills designed to crack down on worker misclassification in construction industry has now been filed ahead of the 2015 session of the Texas Legislature. Lawmakers in 2013 took a positive first step by creating penalties for misclassification on projects that involve tax dollars.
The proposal on the table now is a positive and logical next step.
The language in this bill, filed by Rep. Senfronia Thompson, D-Houston, was crafted by construction executives, workers’ rights advocates and others with a stake in the issue. An identical bill did not pass in the legislative session two years ago. An important point here is that misclassification of workers has been illegal for years. The bill passed in 2013 and the one proposed now only create penalties for something that was already illegal. If there’s no price to be paid for breaking the law, many will simply ignore it. We should also note that there are many legitimate uses of subcontractors. The problem arises when that classification is abused with the intent of cheating the system.
House Bill 434, which you can see in full here, would create a penalty of $100 for each employee not properly reported for an initial violation by the employer and a "penalty not to exceed $1,000 for each employee not properly reported for each subsequent violation that occurs after an initial violation by the employer."
The proposal would also require the Texas Workforce Commission to adopt rules and procedures to “encourage and enforce the proper classification of workers in the construction industry.” Further, the commission would also have to update the Legislature and the Governor’s Office each year about how the enforcement efforts are going. "As soon as practicable after the end of each fiscal year, the commission shall submit a report to the governor and the legislature regarding the efforts of the commission to ensure the proper classification of workers in the construction industry,” the bill says.
If this becomes law, the first such report would be due from the commission at the end of 2016.
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