Contract to Cheat: Followup

Bill to block cheating employers advances in NC Senate

A bill that could help stop mistreatment of laborers and curtail massive tax losses for the state moved closer to law Wednesday as the state Senate unanimously approved a measure to punish companies that cheat workers.

The bill aims to combat the illegal practice of bosses treating workers who should be employees as independent contractors.

To do it, the state would create a special agency in the state budget office to field complaints and investigate claims that a company is pushing workers into contractor limbo to undercut honest businesses. The state would issue fines and shut these employers out of government contracts.

Some employers, such as general contractors or specialty firms such as plumbing companies, would risk losing their licenses. Those employers wanting to get right with the law could come forward through an amnesty program and face no penalty.

“Anybody trying to skirt the issue or blur the line can get straight,” said Sen. Buck Newton, a Wilson Republican, speaking of the provision that lets companies voluntarily seek compliance.

The bill is a result of a five-part series, “Contract to Cheat,” published by The News & Observer and The Charlotte Observer last September. From the Senate floor, Newton thanked the newspapers for bringing the issue to light.

But that nod came with a shake of a finger. The bill also strikes a provision of the current law that allows newspapers to treat delivery carriers as independent contractors.

The bill now goes to the House. On Wednesday, worker advocates heralded its advancement but urged lawmakers to go further.

“This is a very big problem, and there are a lot of people out there who think they won’t be caught. We have to change that dynamic,” said Bill Rowe, a lobbyist with the North Carolina Justice Center. He said he hoped the final version would provide more penalties for companies that misclassify.

Pendleton: Get tougher

Rep. Gary Pendleton, a Raleigh Republican, agreed. He introduced a similar bill this session, and he will continue to push his bill in the House. Because Pendleton’s bill has an appropriations component, it does not need to pass the House by the crossover deadline Thursday night.

“We need more teeth in it,” Pendleton said. “I’ll keep running mine.”

The current bill allows for fines of up to $1,000 per misclassified employee.

The N&O and Observer reported in September that the practice of misclassifying employees as contractors is costing the state at least $467 million a year in lost tax revenue from the construction industry alone. Workers were forced to work in limbo, without the protection of workers’ compensation insurance or unemployment benefits.

Companies following the law struggled to compete against those able to shave 20 percent or more from labor costs by treating workers as contractors.

When a worker is treated as a contractor, employers do not withhold income taxes or pay unemployment taxes. Workers generally must be employees when they are directed when and how to work.

In recent weeks, employers have roamed the hallways of the General Assembly, begging legislators to get behind bills that would crack down on the illegal employment practices.

Doug Burton, owner of Whitman’s Masonry in Raleigh, has struggled to keep his business viable as more and more of his competitors pushed their workers off the books. This week, as he has for years, he tried to explain how maddening it has been to run a business in this climate. On Tuesday, he made his case before the Senate Commerce Committee, which handled the bill the Senate passed Wednesday.

“I think not enough people understand how severe it is. It needs to be treated severely,” said Burton. “I’m glad this is in the works, but there needs to be more to make it truly effective in combating this problem in North Carolina.”

Question about carriers

Several bills addressing misclassification have been introduced this session. Sen. Bob Rucho pushed for the provision that would eliminate the newspapers’ exemption for carriers.

“It doesn’t make sense for the same industry that brought the widespread problem of employee misclassification to our attention to receive a special carve-out protecting them from playing by the same rules as everyone else,” said Rucho, a Mecklenburg Republican, in a news release sent after the vote. “We trust they will recognize the inconsistency and support this important reform to protect their own workers.”

About 12 years ago, newspaper publishers sought and secured a special provision in the law defining newspaper carriers as independent contractors for purposes of workers’ compensation insurance, said John Bussian, a lobbyist for the N.C. Press Association. The effort came shortly after a small newspaper was sued by a carrier hurt while working; the paper didn’t have insurance because it treated him as a contractor.

“It’s too bad newspaper publishers lost this protection from litigation over carriers who are the classic case of independent contractors,” Bussian said.

The possible effect on newspapers such as The N&O and Observer is unclear. Both newspapers contract with distribution companies that arrange for carriers to deliver papers, said Jim Puryear, regional vice president for newspapers owned by McClatchy in both North Carolina and South Carolina.

Puryear said those companies may experience an increase in cost in order to provide workers’ compensation and unemployment benefits, which could be passed on to the newspapers.

Locke: 919-829-8927


By the numbers

$467 million State and federal taxes lost in North Carolina each year from misclassification in the construction industry alone

20 percent A conservative estimate of what cheating employers can save in labor costs by misclassifying employees

$18,284 Federal poverty level for family of three in 2012; roughly the same as the annual earnings of a carpenter in North Carolina that year

45 percent Share of the 826 employers participating in HUD-funded projects in North Carolina from 2009-2013 who appeared to misclassify workers

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