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Gov. McCrory took a step in the right direction this afternoon on the issue of employee misclassification — the persistent problem that plagues thousands of North Carolina businesses wherein workers are improperly treated as contractors when they ought to be employees.  As we have reported on multiple occasions this year (and as Raleigh’s News & Observer documented a while back in its special series “Contract to Cheat,”) this is a huge problem that harms workers and honest businesses and robs the state of tax revenue. Doug Burton, a Triangle area contractor put it this way:

“Treating employees as independent contractors when in fact they are regular employees is a fraudulent business practice that has become an epidemic. Some call this ‘misclassification,’ but it is in fact fraud that lets these cheating businesses – many from out of state – off the hook for basic protections, including minimum wage, overtime pay, workers’ compensation, health and safety protections, unemployment insurance, federal and state tax withholding, social security withholdings and matching and more.

This fraud is a growing problem that harms workers, puts a strain on government resources and provides an unfair advantage when these unscrupulous employers compete with law-abiding businesses. I see it every day. Other legitimate business owners see it, too, when they are regularly underpriced for jobs and there is no other explanation for such bids other than cheating. When cheating businesses classify employees as independent contractors to reduce labor costs, legitimate business and workers alike lose out.”

Today, to his credit, the Governor issued an order that seeks to attack this long-neglected problem. This is from the news release that accompanied the order:

“Executive Order 83 directs the Chairman of the Industrial Commission to appoint a Director to oversee the new section’s activities. The Director will serve as the primary point of contact for reported instances of employee misclassification and will refer all reported instances to the relevant state agencies for investigation and enforcement action.

Governor McCrory has directed the Department of Revenue, the Industrial Commission, and the Division of Employment Security to each appoint a liaison who will work directly with the Director to ensure that their respective agencies are taking proper enforcement actions and sharing all necessary information. The executive order also provides an opportunity for improved coordination and collaboration between the new Employee Classification Section and the Department of Labor and Department of Insurance.”

It’s important to note, however, that the order is far from all that is necessary. Legislation is still required to institute appropriate fines and penalties and the authority for state officials to issue “stop work” orders against cheating employers. Let’s hope lawmakers follow up in the 2016 legislative session. Until then, however, this is a promising beginning and a small bit of good policy news to end the year.

Commentary

There’s been a great deal of justifiable  attention given over the last several months to the issue of “misclassification” — the wrongful treatment of employees by employers as “independent contractors.” As Raleigh’s News & Observer demonstrated in a damning series last year entitled “Contract to Cheat”:

“It’s a tactic that costs taxpayers billions of dollars each year. Yet when it comes to public projects, government regulators have done nearly nothing about it, even when the proof is easy to get.

The workers don’t have protections. The companies don’t withhold taxes. The regulators don’t seem to care.”

This year, North Carolina legislators introduced legislation to attack the problem, but as Raleigh attorney Leonard Jernigan explained in a Progressive Voices essay for N.C. Policy Watch recently, the legislation has been watered down to the point at which it will have little real impact.

“The bills, for instance, do not provide for ‘stop work’ orders that would force companies to halt work on projects until they obtain insurance for their workers.

What’s more, cheating employers are not punished at all until they are caught the second time. And even then, the penalty is a paltry $1,000 fine per employee regardless of how big the business is, how long the cheating has gone on and how much harm may have been caused or the competitive advantage gained over honest employers.

Last and perhaps even more importantly, there is no criminal penalty attached to misclassification fraud. These companies are not confused about the status of their employees. The cheating is blatant and intentional. It’s simply outrageous that an out-of-state company can come in and cheat honest businesses and North Carolina taxpayers out of millions of dollars and no one is even threatened with jail.”

Today at 1:00 p.m., the House Judiciary II Committee will take up the misclassification legislation and, if things go well, consider some toughening amendments to put some actual teeth in it. Let’s hope that, at a minimum, committee members add the “stop work” provision and some real penalties — which at this point — are laughably inadequate.

Commentary

Wake County businessman Doug Burton had had enough of the unfair competition that North Carolina continues to sanction with its failure to pass meaningful laws to crack down on the wrongful treatment on employees as “independent contractors.”

In an excellent op-ed in this morning’s edition of Raleigh’s News & Observer, he lays out the increasing dire problem:

“Treating employees as independent contractors when in fact they are regular employees is a fraudulent business practice that has become an epidemic. Some call this “misclassification,” but it is in fact fraud that lets these cheating businesses – many from out of state – off the hook for basic protections, including minimum wage, overtime pay, workers’ compensation, health and safety protections, unemployment insurance, federal and state tax withholding, social security withholdings and matching and more.

This fraud is a growing problem that harms workers, puts a strain on government resources and provides an unfair advantage when these unscrupulous employers compete with law-abiding businesses. I see it every day. Other legitimate business owners see it, too, when they are regularly underpriced for jobs and there is no other explanation for such bids other than cheating. When cheating businesses classify employees as independent contractors to reduce labor costs, legitimate business and workers alike lose out.”

He goes on to explain why current proposals in the General Assembly are a start but fail to go anywhere close to far enough: Read More

Commentary

Medicaid expansionIn case you missed them while scraping your windshield earlier today, there are two new lead stories  over on the main Policy Watch site today that will be worth a few minutes of your time.

This morning’s Weekly Briefing is an open letter to the one man in North Carolina politics with the clout (and, one hopes, the human decency) to set politics aside and guarantee access to health care for hundreds of thousands of people like Dana Wilson.

Meanwhile, this afternoon’s Fitzsimon File examines what was certainly the strangest claim in GovernorWorkers comp McCrory’s State of the State speech and its apparent origins with a little known administration official who seems to be keeping some odd and perhaps worrisome ties to the private sector.

Commentary

Employers reduce labor costs by misclassifying workers who should be on their payroll as employees, and instead calling them independent contractors. This employer payroll fraud was exhaustively documented by Mandy Locke and her team of reporters in the News & Observer’s series “Contract to Cheat” last fall. It costs the state millions of dollars in unpaid payroll taxes, leaves our unemployment insurance system without revenue to cover unemployed workers, and deprives workers of health insurance,

One of the most damaging consequences of employer payroll fraud is that injured workers are without workers’ compensation insurance. By purchasing so-called “ghost worker” policies, employers can avoid providing real coverage to their workers. Too often, this practice takes place in dangerous industries like construction, which just last year experienced 19 worker fatalities in North Carolina.

Tracking down what appears to be a negligible problem with worker’s comp claims is a misdirected effort. There are many things the General Assembly could do to combat payroll fraud, including worker’s compensation fraud, including increasing penalties for employers who violate the law, beefing up state agency enforcement and collaboration, and providing better enforcement tools such as stop work orders.