For businesses that want to install plumbing or heaters in North Carolina, here’s a message from state regulators: Follow the law and treat workers as employees or don’t do business here.
If some legislators have their way, that message will be locked into law during this session of the General Assembly for those companies and other employers. Companies that improperly treat employees as contractors could risk their professional licenses and face steep fines. Those that do would be barred from doing business with the state.
“We’ve got to protect the worker and fair competition in this state,” said Rep. Gary Pendleton, a Wake County Republican who is planning to introduce a bill Monday that would make employee misclassification a violation of the law.
Investigators for the state licensing board have been working in recent months to crack down on plumbing, HVAC and fire sprinkler companies that cut costs by illegally treating workers as independent contractors.
Nearly two dozen people face discipline by the North Carolina State Board of Examiners of Plumbing, Heating and Fire Sprinkler Contractors. Among them are seven HVAC technicians associated with Southern Mechanical, a Tennessee company highlighted in “Contract to Cheat,” a McClatchy series published last fall about widespread federal labor violations in the construction industry across the country.
Using payroll reports gathered for federally funded projects, The News & Observer and Charlotte Observer estimated the practice of pushing construction workers off the payroll costs $467 million in lost tax revenue each year in North Carolina.
The costs stretch beyond tax dollars. Workers labor without protections such as unemployment benefits and workers’ compensation insurance. Honest businesses find themselves unable to compete with companies that save 20 percent or more in labor costs by treating employees as contractors.
The plumbing and heating board started investigating after the series was published.
“I didn’t want them to get mired up in a bunch of other stuff and let this just sit,” said Dale Dawson, executive director of the board of examiners. “I wanted them to get moving on it.”
It’s one of several moves state leaders and officials have taken since the fall to level the playing field for companies. North Carolina Housing Finance Agency leaders are now forcing developers of affordable housing to collect written pledges from subcontractors that they are abiding by all labor laws. The state Industrial Commission has been issuing fines against companies that go without workers’ compensation insurance for workers who should be employees.
Pendleton, who was elected in the fall, said there is far more the state can do to ensure that businesses follow these laws. As a financial consultant and former board member for WakeMed Hospital, Pendleton said he’s seen the damage businesses can do when they shirk their duty to workers and cheat honest competitors.
His proposal would create a five-person task force charged with investigating complaints of misclassification. The group would analyze data from multiple agencies to detect scofflaws and alert every agency with enforcement responsibility. Those agencies, including the state Department of Labor, the Industrial Commission and Department of Revenue, would be required to alert the task force of any instance of misclassification they find.
The bill would define misclassification and prohibit the practice under state law. Repeat offenders would face fines of up to $1,000 for each employee.
General contractors engaged in misclassification would risk losing their licenses. All other trades that must apply for a professional license in the state must certify that they have read and understand the law against misclassifying workers.
Pendleton said he’s gotten the blessing of Gov. Pat McCrory’s team. At least two other Republicans in the state House are helping sponsor the bill. Pendleton said he expects some pushback from business interests.
“I know they will come lobbying,” he said. “But they are wasting their time lobbying me.”
Sen. Bob Rucho, a Mecklenburg County Republican who leads the Senate Finance Committee, said he’s not familiar with Pendleton’s bill but is interested in seeing it.
Members of the Senate Finance Committee and some House members have been consulting with the Department of Revenue to try to determine which industry has the most problems with misclassification, he said. Construction companies, nursing homes and newspapers, which treat carriers as independent contractors, are areas of concern, he said.
Pendleton sees licensing boards as a major tool to keep business in check. His bill, as drafted, would not give them more authority, however.
The state Board of Examiners for plumbing and heating is seeing firsthand the limits of its authority.
It does not have the power to audit a company’s employment or tax records. When it finds a problem, the most it can do is revoke a license.
None of the companies recently cited for breaking the rules of their license will be fined or prosecuted. They have been placed on a supervised probation; any violation of the terms could cause loss of license.
The board has authority under state codes to place companies or licensees on probation. It can also suspend or revoke a license. That’s where the repercussions stop.
The board’s power centers around being a gatekeeper. To get proper permits in the state, a company must have a properly licensed technician in charge. The board’s regulations are simple: Break the rules, risk losing the license.
Dawson, of the plumbing board, said the sanctions the panel can impose – ranging from a letter of caution to license revocation – are sufficient. He has concerns about monetary penalties, he said, because they can be unfair to small companies, while simply being treated as a cost of doing business for big firms.
But Dawson said it would be helpful to have the ability to randomly audit firms when he has questions about business practices. Now if it gets a complaint, the board must track down employees and check their documentation before approaching a firm. In many misclassification cases, employees can’t be found, he said.
“That would make things easier if we had the opportunity to randomly audit records,” he said.
Finally, the right records
For years, scofflaws went undetected. Payroll reports collected by the newspapers showed hundreds of companies such as Southern Mechanical treating workers who should be employees as contractors at least since 2009. Though the licensing board had received complaints about companies misclassifying employees, it didn’t always have the evidence needed to fully investigate. The payroll reports gave the board a new avenue to investigate.
After the September series, Dawson’s team made use of the public payroll records that the companies performing federally funded work were required to submit.
In addition to violating a host of federal labor and tax laws, the practice of treating employees as contractors also runs afoul of licensing requirements. Because these trades require a level of skill to ensure safe installation, regulations require installers to be licensed or to be under the direct employment – and on the payroll – of someone who is.
The state board that licenses electrical contractors has a similar rule. Tim Norman, executive director of the N.C State Board of Examiners of Electrical Contractors, said the board has an ongoing investigation relating to misclassification but said he couldn’t comment further.
Watching them closely
Among the 64 multimillion-dollar housing projects in North Carolina reviewed by the newspapers, Southern Mechanical won the most HVAC jobs. Through the recession, while so many companies limped along, Southern Mechanical did work on about 50 federally funded or backed projects throughout the Southeast, many of them fueled by the federal stimulus program.
For each one, they submitted payroll forms required on federal projects to prove appropriate wages were paid to workers. On the forms, a company representative left blank a space for tax withholding and explained: “1099 employees pay their own taxes.”
In an interview last summer, the company’s owner, Robert Malick, said a lawyer had advised him a decade before to structure his company with layers of independent contractors.
“It puts the monkey on their back to produce instead of being an hourly employee that just hangs out on the job,” Malick said last summer.
Malick reported his practices to the state licensing board after speaking with a reporter last summer. In November, he entered into an agreement with the board for his company’s license to be put on supervised probation for two years.
During the probation, Malick must submit employment and tax records for his workers, as well as contracts for jobs they perform. Any violation of his probation will result in the loss of his company’s license for a year.
Malick could not be reached for comment.
Six other workers associated with Southern Mechanical submitted affidavits as part of the resolution, saying they had been treated as independent contractors by Southern Mechanical and did not have their own licenses. They each agreed to follow the board’s employment regulations.
More scrutiny for Makson
The board continues to investigate Makson, a Salisbury plumbing company highlighted in the September series for using independent contractors. Company president David Eller has said the company properly classified its workers.
In a review of payroll reports the company submitted for an affordable housing project in Raleigh during the past year, Makson owners listed only plumbers they considered to be employees. Each one had taxes withheld appropriately on payrolls submitted over the course of 2014.
Pat Haywood, an attorney representing Makson, said he couldn’t comment on pending investigations.
According to the payroll reports, Makson’s workforce shifted dramatically in recent years. On other jobs Makson completed in previous years, his payrolls listed dozens of workers, most with Hispanic surnames, as independent contractors. The reports a company administrator submitted in recent months, though, list far fewer workers.
Dawson, the head of the licensing board, said he knows his group has more work to do. He said weeding out misclassification is a priority for the board’s five investigators.
“We anticipate that the investigations are going to continue,” Dawson said. “We still have some outstanding cases.”
By the numbers
The News & Observer and Charlotte Observer found widespread misclassification of employees in federally funded or backed projects they reviewed last year. The newspapers reviewed the payroll records of private companies on 64 multimillion-dollar low-income housing projects. Among the findings:
$467 million Amount of tax revenue lost each year in North Carolina from the construction industry through misclassification.
44 percent Share of the 826 companies taking part in projects reviewed that appeared to misclassify workers.
35 percent Share of the 8,713 laborers on these projects who were wrongly treated as independent contractors.
20 percent Share of an employer’s labor costs saved by using contractors rather than employees.
$18,854 The median annual pay for a carpenter; that’s roughly the federal poverty threshold for a family of three.