Legislation to create a team of investigators to go after cheating businesses gained more momentum at the General Assembly on Wednesday.
If passed into law, a special enforcement unit would mine data and field tips about businesses breaking labor and tax laws. Businesses that illegally treat employees as contractors could be fined or lose their license to do business in North Carolina.
The House Commerce Committee gave its blessing to the bill after a brief debate Wednesday morning. The legislation is now headed for another committee before the full House can vote.
The reforms were sparked by a five-part News & Observer and Charlotte Observer investigation last September into illegal labor practices upending the state’s construction industry.
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A review of payroll forms submitted for government funded housing projects showed more than a third of the workers who should have been employees were treated as independent contractors by their bosses. That status robbed the workers of unemployment benefits and workers’ compensation insurance.
The cheating companies often withheld no state and federal taxes from workers’ paychecks; overall, the practice allowed companies to shave 20 percent or more off their labor costs. Companies complying with labor and tax laws found themselves shut out of jobs, unable to compete against scofflaws. The practice, the newspapers estimated, costs the state $467 million annually in lost federal and state taxes from the construction industry alone.
“We have the most liberal laws that allow for rogue employers than any other state in the South,” the bill’s sponsor, Rep. Gary Pendleton, a Raleigh Republican, told the committee before the vote.
Support from governor
The push to crack down on the practice, called misclassification, has garnered support from unusual bedfellows. Labor unions have lobbied alongside home builders and business leaders. Dozens of high-powered lobbyists filled the committee meeting Wednesday.
Republicans and Democrats praised the effort to bring reform to North Carolina. Gov. Pat McCrory’s legislative liaison, Ryan Minto, addressed the committee, pledging the governor’s support.
The problems to be tackled by the bill blur typical allegiances. Business owners often bristle at more regulation, but honest employers in the state have found themselves undone by an uneven playing field. Republicans often take pride in scaling back government programs, but some have acknowledged existing gaps in the state’s enforcement mechanisms.
Those tensions – weighing the benefit or harm – of hiring more staff to enforce rules already on the books pulsed through the discussion Wednesday. In the end, even the skeptics believed the state was not doing enough.
“In reality, a law is only a law to citizens if it is enforced,” said Rep. Chris Millis, an Onslow County Republican. “The actual mechanism that you are setting up is to make sure the existing law...is actually going to be enforced.”
Advocates want more
Pendleton’s bill has been scaled back from its original version. He had sought the power for fraud investigators at the state’s Industrial Commission to issue “stop work” orders if they found a company operating without workers’ compensation insurance.
He also wanted stiffer fines – $5,000 per employee rather than $1,000. But Pendleton agreed to pull back his proposal to make the bill palatable to the powerful business lobby. He said lawmakers can massage the program later if needed.
Labor-friendly groups, and many honest employers, wanted a stricter bill.
Doug Burton, owner of a masonry firm that has competed against cheating businesses for years, urged the committee members in a letter to do more.
“With a watered-down bill that does little if anything to address this fraud, who are we serving and protecting?” he wrote. “Certainly not those businesses that abide by the law and pay their taxes.”
The legislation has several more hurdles to pass before becoming law. If successfully passed by a House Judiciary Committee, it must survive scrutiny by House budget leaders because it would cost nearly $300,000 a year for investigators. Then, the House and Senate must agree on a final version.
The Senate unanimously passed a similar version of the bill last month. But it also would eliminate a provision that now allows newspapers to treat delivery carriers as independent contractors; the House bill doesn’t change that part of existing law.