Lawmakers Go After Employers Who Misclassify Workers as Contractors
Nearly three years ago, Warren, Ohio, Local 573 Business Manager Mark Catello found out the hard way how rampant is the illegal practice of misclassifying workers as independent contractors to circumvent labor law and cheat on taxes.
The local tried organizing cable workers at Baker Communications, a subcontractor for Time Warner Cable. Organizers got the majority of the 40-person unit to sign union authorization cards, but the National Labor Relations Board killed the unionization drive after agreeing with the company that most of its employees were independent contractors, making them exempt from the right to collectively bargain. “It’s a scam,” Catello said. “All the employees had to follow the company’s manual, wear the company’s uniform with the Baker Communications logo on it and follow their work schedule.”
Federal and state officials are now starting to aggressively crack down on employers who mislabel their employees as independent contractorsâ€”an act that cheats both taxpayers and workers out of billions of dollars.
According to Steven Greenhouse of the New York Times, more than two dozen states are stepping up their enforcement of employment laws by increasing penalties for employers who misclassify workers as contractors. And Congress recently introduced tougher legislation to punish lawbreakers.
The practice is extensive, says James Parrott, chief economist of the Fiscal Policy Institute in New York. He testified earlier this year before the state Senate that an estimated 10 percent of the state’s workers are misclassified as independent contractors.
According to the Bureau of Labor Statistics, that number has been estimated to be as high as 30 percent in some states. Lax enforcement of the rules has only encouraged the practice.
In 2007, the Government Accountability Office reported that 10 million workers were classified as independent contractors, an increase of more than 2 million in just six years.
Misclassification ends up costing federal and state authorities billions in lost revenue. Companies that report employees as independent contractors avoid paying Social Security, Medicare and unemployment insurance taxes.
But misclassifying workers also cheats workers out of their rights and benefits. Laws regarding overtime, workers’ compensation, sick days and minimum wage don’t apply to independent contractors.
“This denies many workers their basic rights and protections and means less revenues to the Treasury and competitive advantage for employers who misclassify,” Jared Bernstein told the New York Times. Bernstein is a noted economist and aide to Vice President Joseph Biden. “The last thing you want is to give a competitive advantage to employers who are breaking the rules.”
The practice is particularly common in trucking and some sectors of the construction industry. It is also found in the telecommunications industry, particularly in satellite dish and cable installation.
And it’s not just fly-by-night operations that are guilty. Corporate giants FedEx, Target and Comcast have all been sued for misclassifying workers.
Counting their workers as contractors has also proven to be an easy way for employers to prevent unionization.
â€˜Keeps Them From Joining a Union’
For Eighth District Organizer Bob Brock, a crackdown on industry violators is long overdue.
Brock has been trying to organize workers who install home satellite dishes for more than a year. Many of these workersâ€”located mostly in Idaho, Montana and Coloradoâ€”endure long hours, low pay, draconian work rules and unsafe working conditions. But according to their employersâ€”including Direct TV and Star West Satelliteâ€”they are their own bosses.
“Most of these (satellite) companies operate a whole separate wing, which they staff with what they call independent contractors,” Brock said. “But they have to follow the companies’ regulations, their work hours and use their equipment. What kind of boss is that?”
Brock says that the IBEW has been successful in getting many of these workers to talk with organizers, but until their job status is changed, they can’t legally form a union.
He says he has seen workplaces where two different workers are doing the exact same job, but one is labeled an employee while the other is an independent contractor. “It’s a selective way for the company to get out of paying benefits and taxes and to keep them from joining a union.”
Educating Workers on Their Rights
But the IBEW hasn’t given up on organizing the satellite sector. The Eighth District has started an organizationâ€”Satellite Techs Allied for a New Directionâ€”which brings together satellite workers to improve their working conditions. Organizers help workers document what’s going on in their workplace so they have evidence to back up their claims that they are full-time employees.
STAND also helps misclassified workers with tax advice and how to avoid being preyed on by unscrupulous insurance agents who try to sell them overpriced liability policies. It’s a long-term strategy, Brock says, but the campaign is starting to pick up steam. “The word is spreading throughout the industry. A lot of them don’t know about their rights and they are hungry to find out.”
The campaign is now moving into lobbying mode, with organizers talking to state leaders about rampant abuses in the satellite installation industry. “This is a good time, because with the budget shortfalls, politicians are more eager to crack down on tax cheats,” Brock said.
Broadcasting is another industry where the practice has become widespread. “Many broadcast technicians will work for one of the big networks, be considered an employee, but then go work for another network, do the exact same job, and all of a sudden they become contractors,” said Broadcasting Department Director Ro Wratschko.
Many smaller production companies are also notorious for misclassifying employees to give them unfair advantage over local signatory companies. “They are bidding for the same work as our union shops but they are illegally getting out of paying the same taxes we do, so they have a leg up,” he said.
While not as rampant in the electrical construction industry as it is in other trades, many inside locals have confronted nonunion contractors trying to pass off their employees as contractors. Last fall, Dublin, Calif., Local 595 helped bring to light one Bay Area contractor who cost the state and her employees millions of dollars by illegally misclassifying them.
“It’s the primary means for nonunion contractors to get out of their responsibilities to their employees and try to cut into our market share,” said Kirk Groenendaal, Special Assistant to the International President for Membership Development.
Federal prosecution of companies that misclassify their workers as contractors was nonexistent under the Bush administration, says Political and Legislative Department International Representative Dan Gardner, but the tide is turning.
President Obama has promised to hire an additional 100 investigators to look at companies accused of misclassifying workers and the Internal Revenue Service announced in February that it was launching a three-year nationwide investigation of the practice.
On Capitol Hill, Massachusetts Sen. John Kerry (D) has introduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009â€”with Rep. Jim McDermott (D-Wash.) sponsoring a House versionâ€”which beefs up enforcement of worker classification regulations and closes tax loopholes used by unscrupulous employers.
In April, Ohio Sen. Sherrod Brown (D) introduced a similar billâ€”the Employee Misclassification Actâ€”that focuses on tougher enforcement of the Fair Labor Standards Act.
The Department of Labor also recently announced tougher regulations of worker classification regulations, calling on employers to disclose to their employees their work status.
State authorities are also intensifying their crackdown. In Iowa, a six-month investigation by the labor department recently found more than 100 companies guilty of misclassifying employees, while in California, Attorney General Jerry Brown is aggressively going after lawbreakers, recently filing a $4.3 million lawsuit against a construction company with several public works contracts that he says cheated workers out of wages.
In Nebraska, a bill is under serious consideration that would target trucking and construction companies that abuse the independent contractor label.
Gardner said that the IBEW is working closely with NECA contractors and other businesses to push Congress to endorse Sens. Kerry’s and Brown’s legislation to crack down on lawbreakers. “It’s wrong for workers, wrong for taxpayers and wrong for the businesses that play by the rules and follow the law.”
This post originally appeared in IBEW.org on June 2, 2010. Reprinted with permission.
About the Author: Alexander Hogan is Communications Specialist for the IBEW.