Gov. Pat McCrory’s warning Friday to bosses who cheat workers by pushing them off the books and into limbo: We are watching.
Months after legislators failed to pass a bill that would crack down on companies that illegally treat employees as contractors, McCrory used his own authority to direct state officials to find and penalize problem employers. The first-term Republican ordered the state Industrial Commission to establish a unit to look into complaints of employee misclassification and coordinate with other state agencies to enforce existing laws.
The practice of misclassification puts workers in vulnerable situations, robbing them of insurance in case they are hurt at work or laid off. It also hurts businesses that play by the rules, leaving them unable to compete against cheating companies able to shave 20 percent or more off their labor costs.
A News & Observer investigation last year estimated that misclassification in the North Carolina construction industry alone is robbing the state and federal government of $467 million a year in taxes.
“When unethical employers improperly classify their employees as independent contractors, they not only put our state’s workforce at risk, but also put ethical businesses at a competitive disadvantage and rob taxpayers of significant revenues,” McCrory said in a written statement. “The Employee Classification Section will work with other state agencies to ensure that every potential violation of our state’s laws will be thoroughly investigated.”
Order a surprise
Since 2012, state leaders have tried with little success to find ways to force employers to properly classify employees. Agencies worked in silos, rarely sharing information about cheating companies. Each tended to its specific regulations and no more.
In August 2012, then-Gov. Bev Perdue convened a task force of state leaders to figure out how to fix the problem. Their recommendations sat dormant for much of 2013, as new leaders moved into the executive branch and General Assembly.
This year, a bill aimed at creating a special team of investigators in the Department of Revenue to target companies that misclassified faltered in the final hours of the legislative session; newspaper publishers fought to stall the bill after a late amendment singled out newspaper carriers.
The bill’s sponsors planned to push for it again when the session convened next spring. The bill’s lead sponsor, Rep. Gary Pendleton, a Wake County Republican, was taken aback Friday by the governor’s executive order.
Pendleton had worked since the session’s adjournment to lobby his counterparts to pass the bill the first week of the next session; he didn’t know the governor had a plan to address misclassification.
Pendleton said the legislature should look for ways to help further efforts brought by the executive order.
“The executive order can’t do anything but help,” Pendleton said. “But it’s a stopgap. We will need to go further.”
Businessman wants penalties
McCrory’s order, for example, does not establish additional penalties for companies that misclassify workers. It charges a new appointee within the Industrial Commission to receive and direct complaints to counterparts in the Department of Revenue and the Division of Employment Security.
The order invites cooperation from the state labor and insurance departments.
Doug Burton, owner of Whitman’s Masonry Company in Raleigh, has struggled for years to compete against companies that cheat. Burton logged days at the General Assembly this year and called anyone who would listen. He sighed Friday afternoon when he heard about the governor’s executive order.
“I hope it’s not the end,” Burton said, noting that strong penalties would send a message to employers who cheat. “But if it helps serve the purpose of ridding the state of North Carolina of misclassification, I’m all for it.”
During the last 18 months, the Industrial Commission has had some success in enforcing workers’ compensation laws on uninsured companies. It had not been yet been able to bear down on companies skimping on insurance because they misclassified employees as contractors.
“We don’t have all the information we need to be able to make that call,” Bryan Strickland, head of the Industrial Commission’s fraud unit, said in a recent interview.
The executive order signed Friday might provide the additional help the commission needs.