State leaders promised change this week after years of regulatory malaise that has enabled a labor scheme that cheats vulnerable workers and robs the state and federal government of nearly one-half billion dollars each year from North Carolina alone.
Gov. Pat McCrory said Thursday that he will endorse and help shepherd legislation to penalize companies that knowingly and improperly treat workers as independent contractors to gain competitive advantage.
“It isn’t fair to the workers. It isn’t fair to those employers following the law. It’s not fair to the taxpayers,” McCrory said in an interview. “It must be fixed.”
McCrory, a Republican, spoke after The News & Observer and Charlotte Observer concluded a five-part series detailing the extent of misclassification in the construction industry in North Carolina and nationally.
Other leaders vowed action, too.
North Carolina Attorney General Roy Cooper, a Democrat, said the state must tackle misclassification. He committed lawyers in his agency to help revenue and housing officials determine what can be done about companies that appear to have misclassified their workers on government projects reviewed by the newspapers.
Lyons Gray, state secretary of revenue, said he would consider asking tax examiners to review those reports. He said people with information about cheaters should call 877-252-3052 or email Communications.HQ.MAIN@dornc.com.
Business owners who follow the law expressed anger this week, saying that the state had years to fix the problem while they struggled to keep their companies afloat through the recession and recovery.
“No matter how much complaining you do, North Carolina and its leaders just walk away from it,” said Michael Melandro, owner of a Charlotte towing company who said he is repeatedly undercut by competitors who treat their drivers as independent contractors. “They are just putting their head in a little hole in the ground.”
‘They are laughing’
The flurry of activity followed an investigation by The N&O and the Observer, along with six other McClatchy newspapers, detailing the widespread practice of construction companies treating workers as independent contractors rather than employees as the law requires.
The series, “Contract to Cheat,” used federal payroll records to document the prevalence of the scheme on publicly funded housing projects through the Great Recession as the government pumped money into communities. From local housing authorities to Capitol Hill, regulators ignored the cheating, enabling businesses willing to skirt the law to prosper on taxpayer-funded projects.
Businesses that followed the law were largely shut out of the jobs, unable to compete with companies able to shave 20 percent or more from their labor costs by treating workers as contractors. The advantage comes because they don’t pay unemployment or payroll taxes and do not withhold taxes from workers’ paychecks; many do not provide workers’ compensation coverage.
The newspapers estimated that if the level of misclassification found on 64 government-backed housing developments extends to the construction industry as a whole in North Carolina, the state and federal government are losing $467 million a year in taxes. That’s roughly the size of the budget shortfall legislators initially faced this year as they tried to find ways to give raises to public-school teachers.
“If they’d just collect the money that’s owed, they wouldn’t have trouble paying the teachers what they need. These people are cheating. They are cheating our teachers every day,” said Steve McLendon, a retired concrete contractor from Charlotte. “These guys, they know they are breaking the law, and they are laughing at the state and federal government.”
The state had the chance to fix this in 2012. The N&O revealed the practice – and its victims – in a series called “The Ghost Workers.” Bev Perdue, then the governor, convened a task force of state leaders to map out a plan. That group of officials presented a detailed list of solutions to McCrory in January 2013 and asked for further direction.
They got none. The group stopped meeting; the majority of its recommendations went unheeded.
Vows to act
McCrory, however, said Thursday that he had taken the task force’s recommendations to heart. He said he asked Andrew Heath, whom he appointed to head the state Industrial Commission in May 2013, to offer solutions.
Heath turned to some pieces of legislation previously drafted but never adopted into law. One of them defines who can be an independent contractor and allows the commission to fine companies that misclassify in order to avoid purchasing workers’ compensation insurance. He also found ways to combat workers’ compensation fraud.
Rick Glazier, a state representative from Fayetteville, has twice submitted legislation to make misclassification a crime with severe penalties. Glazier, a Democrat, didn’t get far. The bill never left a committee.
This week, Glazier said he would try again if McCrory and other Republicans didn’t address it first. Glazier also said it was time that the state Department of Labor took action against employer misconduct.
“The willful blindness and the woeful inadequacy of our North Carolina Department of Labor, and almost unwillingness to do any serious investigative work into employer misconduct, is giving (companies that break the law) the green light,” Glazier said. “It is a wink and a nod. ‘Don’t make it so obvious we have to do something – but, shy of that, just go for it.’ ”
Labor Commissioner Cherie Berry has declined to be interviewed. Berry, a Republican first elected in 2000, oversees a division that handles complaints about workers not getting paid minimum wage and overtime payments, violations that often occur when workers are misclassified.
On Wednesday, a spokeswoman again declined to make Berry or anyone in the agency available for an interview, saying the newspaper misunderstood Berry’s role in dealing with labor violations such as misclassification.
Josh Stein, minority whip in the state Senate, said that public agencies should be forbidden to grant contracts to businesses that misclassify and that licensing boards ought to have more authority to go after businesses that break the law.
“The agencies that have authority have to aggressively enforce the law,” Stein said. “There’s no other option at this point.”
An angry employer
Employers across the state contacted the newspapers this week expressing frustration and anger over the lack of traction on the issue since 2012. Many of them had filed complaints against cheating competitors with state regulators in recent years, only to get no response and no relief.
Liz Etheredge and her husband, Howard Etheredge, run a painting company in Charlotte by the letter of the law. For years, they’ve been shut out of jobs by two staffing firms that Etheredge says treat workers who should be employees as independent contractors.
After reading the newspaper reports in 2012, Etheredge began calling state regulators to report her competitors. She never heard back. Etheredge said the companies continue to beat her family’s firm out of jobs each week.
“They are still in business, and it makes me sick,” Liz Etheredge said. “We turned them in on a silver platter. Nothing gets done. What a bunch of hypocrites.”
Etheredge emailed state leaders again this week after reading “Contract to Cheat” to express her disappointment. She hasn’t received a reply.
Republican legislators said they would begin discussing the problem and considering solutions in the coming weeks.
Sen. Bob Rucho, a Republican from Matthews and chairman of the Senate Finance Committee, said that legislators will ask the executive branch if new laws or funding for enforcement resources are needed.
“We’ve been dealing with several priorities, this being one of them,” said Rucho. “We’re not ignoring it; we’re studying.”