The Ghost Workers: Part 3

Inept bureaucracy lets dishonest businesses win

By sharing data, North Carolina agencies could level the playing field for honest employers

mlocke@newsobserver.com draynor@newsobserver.comAugust 20, 2012 

  • The series Sunday: Working off the books Monday: A policy, but no coverage Today: Bureaucrats in silos
  • More information about the analysis To check on businesses that don’t have workers’ compensation coverage, The News & Observer matched a database of workers’ comp policies from the N.C. Rate Bureau with a database of 2011 workplace safety inspections from the state Department of Labor. Of 4,900 inspections, we were able to match 1,800 business names. Three hundred of those 1,800 – or 17 percent – appeared to have workers’ compensation policies that had expired at the time of the inspection. It’s not clear how many of the 3,100 businesses that didn’t match had no coverage at all because of variations in the way names of businesses were entered into the two databases. Some businesses also may not have three or more employees, the threshold for needing workers’ comp.
  • About this series In April, The N&O reported that at least 30,000 North Carolina businesses had not bought workers’ compensation coverage, as required by law. After that report, we heard from workers, lawyers and business owners about deeper problems surrounding laborers and businesses, particularly in the construction industry. To report this series, we reviewed thousands of pages of documents and computerized records and conducted dozens of interviews.   The N&O Team Reporter: Mandy Locke Database editor: David Raynor Editor: Steve Riley Photographer: Shawn Rocco Photo editor: Scott Sharpe Copy editors: Tracy Hill, Leland Senn Design: Eric Edwards Graphics: Tim Lee Online: Bob Brueckner News research: Peggy Neal, Brooke Cain
  • Who’s in charge? Department of Labor: Cherie Berry Division of Employment Security: Dempsey Benton Department of Revenue: David Hoyle Department of Insurance: Wayne Goodwin Industrial Commission: Pam Young

Last of three parts

Every day, the state Department of Labor dispatches workplace inspectors to check for proper emergency exits, ample fire extinguishers, active safety training programs and dozens of other items needed to keep North Carolina workers safe on the job.

One thing they’re not asked to look for: proof of workers’ compensation coverage for injured employees.

That check could be valuable, a News & Observer analysis of other available data shows. The N&O, matching data of workers’ compensation policies from the N.C. Rate Bureau and the labor department’s 4,900 safety inspections last year, found 300 businesses whose workers’ comp coverage appeared to be expired at the time of the inspection.

It’s a simple cross-check of databases easily available to state officials and could serve as a starting place for bureaucrats charged with ensuring that businesses buy insurance to protect workers.

But no one in state government has bothered to do it. Not the Department of Labor, which is responsible for workplace safety. And not the state Industrial Commission, which oversees disputed workers’ compensation claims – and often encounters businesses without insurance.

North Carolina’s state agencies operate in silos. They each tend to their specific set of laws and rarely share information with counterparts who may detect other violations.

Business owners who break the rules are pocketing as profit what they are required to spend on taxes and insurance.

“It’s one of those things where everybody’s turning a blind eye,” said Roger Baker, who, along with his brother, Donnie, runs Southern Metal Systems in Wendell. The brothers say their commercial roofing company has struggled in recent years as they compete against companies shirking insurance and tax obligations.

“People will police themselves if they start cracking down,” Donnie Baker said.

If only they knew

The missed opportunities for enforcement are glaring:

• When the Industrial Commission encounters an employer who is paying workers under the table, it doesn’t inform the state Department of Revenue. The commission also has no policy or mechanism to alert its counterparts at the state Department of Insurance when it encounters an agent who misrepresented a workers’ compensation policy to a business owner.

• When the state Department of Labor’s Wage and Hour Division investigates a complaint that an employee hasn’t been paid appropriate overtime, no one flags the case for the state Department of Revenue to check on whether the business pays required withholding taxes.

• While the Department of Revenue gives the Division of Employment Security a list of new businesses, it doesn’t send that information to the Industrial Commission so it can check for workers’ compensation coverage.

• There’s little communication between these agencies and the State Construction Office or the Historically Underutilized Businesses program. Coordination could prevent businesses that break the law from working on public projects.

“We just suck at synchronizing things that are supposed to be helping people,” said state Rep. Dale Folwell, a Winston-Salem Republican who has studied uninsured employers. “None of this surprises me, but it disappoints me.”

Obstacles for sharing data

Agency heads offer plenty of excuses. All blame limited resources and say they are focused on their own agency’s mission. State Revenue Secretary David Hoyle said he’s prohibited by law from sharing revenue data, which includes federal tax information.

Labor Commissioner Cherie Berry says checking for workers’ compensation insurance is not the job of her agency.

“We’re not set up as a state to have a place that’s a repository for that information so that it could be taken to the next level,” said Berry, a former state legislator. She said telling the Industrial Commission would have limited effect: “Their system is so antiquated, what are they going to do with it?”

At the Industrial Commission, chairwoman Pam Young said her agency’s computer system is so outdated that it prevents the commission from easily sharing information with others, even statistical data that the law requires it to provide to the state Department of Labor about workplace injuries. She blames limited resources for floundering efforts to detect compliance.

The commission’s system dates back to the 1970s and is in the process of being replaced, though it probably won’t be completed until 2015. The Industrial Commission keeps part of its fees to replace its system, and since 2006 it has collected nearly $8 million for the job.

Legislators appear to be interested in the potential for agencies to share data. Last year, they directed the state controllers office to survey agencies’ database and fraud-detection capabilities. A report is due to the legislature in October.

Audits show problems

Businesses skirting laws is not a new problem. But as the economy faltered, it became more glaring, business owners say. That’s when business owners who follow the laws started seeing competitors submitting mysteriously low bids.

“We had all the work we could handle four years ago,” said Donnie Baker, the roofing company owner. “... Suddenly, anything goes.”

Some businesses classify employees as contractors to avoid paying for workers’ comp insurance, overtime and unemployment taxes.

Ted Brinn, head of tax enforcement at the state Division of Employment Security, said his office started hearing more about employers inappropriately treating workers as contractors when the economy faltered and the state’s unemployment reserve emptied.

The agency audits 1 percent of businesses annually and tries to make educated guesses about the industries most likely to be evading taxes. Of the 2,627 audits the division performed last year, about 40 percent of the companies had misclassified employees, which amounted to more than $70 million in unreported payroll.

Examiners found misclassification in an additional 3,000 cases through tips and problems when workers applied for benefits.

The agency’s scope “needs to be bigger than it is,” Brinn said.

The Division of Employment Security looks into other complaints, too, but Brinn suspects his office is hearing little from undocumented workers, who aren’t entitled to collect unemployment benefits even though employers are required to pay taxes on them.

Some states tackle problem

Other states, driven largely by plummeting revenues, have tried to account for missed tax dollars in a more complete way.

A 2009 report by the federal Government Accountability Office found that independent contractor misclassification cost the federal government approximately $2.72 billion in 2006. In Connecticut, 42 percent of audited employers had misclassified workers; that had cost the state $65 million in unpaid state income tax and $17 million in unemployment tax. In California, nearly a third of audited businesses erroneously treated workers as subcontractors; so far the state has collected $137 million in state income tax from those businesses.

The federal Department of Labor, too, has been targeting the misclassification problem since 2010. States that have both unemployment tax investigators and wage and hour investigators in the same department were invited to enter into an information-sharing agreement to help detect problems.

But North Carolina’s unemployment tax division is under the Department of Commerce. Wage and Hour investigators are within the state Department of Labor.

Berry, the labor commissioner, said businesses that break the law shouldn’t be allowed to prosper. But even if she had been asked to sign on with the federal initiative, she would have been reluctant.

“If it didn’t deal with our mission of safety and health, we probably would have said no,” she said.

Half-hearted starts

State officials in Louisiana realized several years ago that their agencies’ efforts to regulate businesses were too fragmented.

They spent $4 million on a database that would collect all the information various agencies collected. So far, they have tackled common schemes such as corporations creating various shell companies to hide employees to lower their unemployment insurance burdens.

In just six months last year, the state collected $1.2 million in unpaid unemployment tax from several companies involved in the scheme.

Leaders in North Carolina say there is occasional chatter about sharing information among state agencies. Those talks usually dissolve quickly as agencies get back to their own responsibilities.

Last year, a bill that would provide a remedy for workers who’ve been misclassified never left a House committee.

“It did not resonate (with legislators),” said Rep. Rick Glazier, a Fayetteville Democrat and one of the bill’s sponsors. Glazier said he’ll try harder next session.

North Carolina is seen nationally as being behind the curve in addressing misclassification, said Catherine Ruckelshaus, a policy analyst with the National Employment Law Project, a nonprofit that studies trends and policy efforts related to employment.

About half the states are trying. North Carolina is not.

“There are ways to go about this without re-creating the wheel, but there has to be political will ...,” Ruckelshaus said. “They don’t need new laws. They don’t need (more) authority. ... It’s (being) in your face if you are doing that.”

Compliance goes slowly

Since a News & Observer investigation in April revealed that at least 30,000 businesses required to carry workers’ compensation insurance don’t, the Industrial Commission has struggled to create a compliance program.

Commission leaders have said many who don’t carry insurance are small, fly-by-night operations.

Yet The N&O found that many of the uninsured employers were on the radar of another state agency. One had registered a fleet of trailers at the Division of Motor Vehicles. One had been before the commission before with an uninsured claim. The commission scolded him for failing to keep insurance but never followed up.

The commission did step up efforts to collect on old uninsured cases. It resurrected hundreds of old cases in which commissioners had ordered an uninsured employer to pay but never followed up. In 48 cases, the commission has forced payments to injured workers or collected penalties for failure to buy insurance.

Young awaits recommendations from a legislative study commission appointed this summer to study employers without workers’ compensation coverage.

But Young, who was appointed by Gov. Mike Easley and whose term ends in 2014, insists that it’s not the commission’s job to alert other agencies about businesses that might be cheating.

“The Industrial Commission’s role, as I see it, is to ensure that there is coverage for employees who are injured on the job,” Young. “Whether or not that business is competing fairly or unfairly, we don’t get into that debate because that’s not our charge.”

Locke: 919-829-8927

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