Misclassification Update in Texas

Press release from Emily Timm of the Workers Defense Project about the Texas Workforce Commission vote this Monday on proposed legislation to strengthen penalties for worker misclassification in Texas:

As unemployment coffers go empty, TWC votes down proposal to increase penalties for employers who misclassify workers

Dishonest Employers Cheat Texans out of $35 Million in Taxes

Austin, Texas—On Monday, in a 2 to 1 vote, the Texas Workforce Commission declined to support a recommendation for the coming legislative session that would strengthen state penalties for employers who misclassify their workers as independent contractors, thus encouraging businesses to abide by the law, and leveling the playing field for honest employers. In Texas, misclassification results in a loss of at least $35 million dollars to the starved unemployment insurance fund each year.

Employers misclassify their workers when they fail to withhold taxes, pay in cash, or provide their employees with a 1099 instead of the W-2 form required for employees. Misclassification results in billions of lost tax dollars to the federal and state government. In certain industries in Texas, such as construction, it is estimated that as many as 38% of workers are misclassified. Texas employers who break the law and undercut responsible businesses save an estimated 9% on payroll taxes including workers’ compensation, costing Texas taxpayers millions in unemployment insurance each year.

Commissioner Ronnie Congleton, who proposed the recommendation, explained, “we need to bring the rule of law to address the underground economy in Texas. Misclassification hurts workers and employers. Workers are denied social security, Medicare and other benefits; honest employers face unfair competition and lost revenue to the unemployment trust fund which hurts Texas employers who play by the rules. Current Texas law encourages misclassification and the penalties don’t exist to create an incentive to comply with the law.”

However, Chairman Pauken and Commissioner Alcantar disagreed, denying that misclassification is a significant problem for Texas businesses. 

But responsible businesses say that they can’t compete against companies who misclassify their workers. Brendan Doyle, of Marek Brothers Systems, a specialty contractor that has been in business for 72 years, explains, “Marek Brothers plays by the rules, we pay all of our taxes, and yet we have to compete against dishonest companies who routinely underbid us.” The TWC decision keeps upstanding businesses that properly classify their employees at a disadvantage by not strengthening the penalties against those who don’t. Doyle, who attended the hearing, was disappointed with the commission’s vote.

In fact, honest employers end up paying twice under the current system.  Timm: "Honest businesses first have to compete with companies that refuse to abide by the law, and then they pay again when the tax rate increases to replenish the fund when it gets low."

If the Texas Workforce Commission increases the tax rate in the coming year to alleviate the unemployment insurance fund, responsible businesses will bear the brunt of the higher costs.

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1  Based on Fiscal note from HB3191 (79). The TWC estimates that $698,122.80 dollars of unemployment insurance taxes are lost on the 2% of employers they audit. The estimate assumes that each employer found to be misclassifying only had one misclassified employee.

2  Cox et al. Building Austin, Building Injustice: Working Conditions in Austin’s Construction Industry. University of Texas, June 2009.

3  Interview with Laura Moskowitz, National Employment Law Project staff attorney.  Conducted on 1 May 2009.

Updated 11/30/2010