Over the years, the Construction Citizen team has put a bright spotlight on the myriad problems caused by worker misclassification. Those difficulties continue to mount while Texas lawmakers do very little about it, much to the frustration of ethical companies that cannot compete with cheaters, many single mothers who are denied child support payments, conservative activists upset about illegal immigration, and workers’ rights advocates who believe in a better standard of living for those who toil in the hot Texas sun.
Worker misclassification is one of the major underlying problems when it comes to fixing all those challenges.
If you're unfamiliar, worker misclassification is a fancy term for cheating on payroll. That’s why labor activists call it “payroll fraud.” It happens when a boss pretends their worker is an “independent subcontractor” instead of an employee even when, by law, the person should be on the books as an employee. Many employers do this with the goal of avoiding payroll taxes, workers' compensation coverage, and other benefits and protections in place when there is a true employer-employee relationship. Keep in mind that there are many legitimate uses of contract labor, but the IRS has legal definitions for who is an employee and who is a contractor.
It is such a complex issue that touches so many facets of our society that it can be difficult to get your mind around. The bottom line, though, is that the erosion of the employer – employee relationship has degraded the middle class and made life harder for honest working people as well as ethical, law-abiding employers.
According to the National Conference of State Legislatures, or NCSL, "a big incentive in misclassifying workers is the savings on labor costs, which typically are a major portion of overhead for businesses. It’s estimated that a business can save 30 percent of their labor costs by using independent contractors rather than employees."
Taxpayers as a whole are picking up the slack, the NSCL said. “A report by the Government Accountability Office estimated that in 2006 alone, the federal government lost out on $2.72 billion in Social Security, unemployment and income taxes because of employee misclassification,” the group wrote.
“States report similar tax losses,” the NCSL went on. “Rhode Island estimated that more than 6 percent of its workers were improperly classified as independent contractors, costing the state an estimated $50 million in uncollected income, unemployment and other payroll taxes. A study on misclassification in Illinois showed the state lost close to $125 million in income tax revenue from 2001 to 2005. A New York task force investigating workplace fraud found that, in 2008, misclassification cost the state more than $4.8 million in unemployment taxes alone."
The NCSL also offers a rundown of various attempts by states to rein in misclassification in 2014.
Worker misclassification also creates a gray area in which unscrupulous employers skirt immigration laws so that they can exploit that labor. Writing for the conservative website Breitbart Texas, Bob Price wrote that a proposal before the Texas Legislature would go a long way toward reducing illegal immigration in this border state:
“Companies use worker misclassification as a tool to cheat the system and create an unfair competitive advantage over companies that properly classify their workers as employees. The misclassification also allows companies to cheat workers out of overtime pay and benefits. Additionally, companies frequently use worker misclassification as a tool to work people not legally eligible to work in the United States.”
More to the point, Price said:
“Companies will also use the practice of misclassification to get around employment laws regarding illegal immigrants. Companies that improperly utilize their workers as independent contractors are not subject to e-verify requirements in certain contracts. They also do not withhold income and social security taxes on the workers which increases their unfair competitive advantages over companies that obey the law.”
There is another twist here. Some employees will actually ask to be misclassified. When they do, their intentions are almost always bad.
Case in point: Rex Gore runs a janitorial company based in Austin, Professional Janitorial Services, and recently told the Texas Tribune that he’s seen employees leave his company so that they could find work as independent contractors specifically because they want to avoid making child support payments:
“There is a wage garnishment for child support order that comes in and comes out of their check,” said Gore, who has offices in Austin, El Paso and San Antonio and employs about 3,000 people. “It’s not unusual for a person in that situation to mysteriously quit, take their last check and use some rationale about schedule or something else.”
When he hears about the former employee’s whereabouts later, he said, his suspicions are almost always confirmed: The person found work as an independent contractor to avoid wage garnishment.
“Best you can tell it’s probably in an environment where they’re being paid under the table or being paid as a 1099 [independent contractor] employee, and in some way avoiding paying the garnishment,” he said.
Tribune Reporter Julian Aguilar also talked with Janece Rolf in the Attorney General's Office, because that’s the agency responsible for collection of child support:
Rolfe said enforcement is the same regardless of how an employer classifies its workers. “When [an order] is not being followed, we call the employer, we explain the law and send written notification of consequence if they violate the law. We have a database of employers. In fact, we have 400,000 employers that are tied to a child support case in our caseload, so if an employer is not complying we would be able to look and see, have we sent a wage withholding order to that employee.”
Rolfe said that pending legislation would help expedite the collection process when a person is properly classified and changes employers. Senate Bill 1727 by state Senator Brandon Creighton, R-Conroe, would include “independent contractor” under the official IRS definition of “employee.”
"That’s for the purpose of new hire reporting," she said. "Not only do employers honor wage withholding orders when we send them one, but they are also required to report any newly hired individual to us within a certain time frame."
Despite all these problems, lawmakers at the Texas Capitol are largely doing nothing about worker misclassification. Senator Creighton’s effort appears to be a good one, but his bill has yet to even receive a hearing.
Former Senator John Carona, R-Dallas, led a major push in the Texas Legislature two years ago to crack down on worker misclassification, but it was ultimately derailed by the state’s largest home builders. Now the bills that have been filed are languishing and have not been heard in committees. The Texas Legislature meets for a few months ever two years and time is running out as this legislative session enters its final eight weeks.