Contract to Cheat: Followup

Tax cheating bill caught in newspaper carrier flap

A 12-year-old special “presumption” state lawmakers granted to newspapers to avoid treating carriers as employees has become a roadblock for reform legislation directed largely at the construction industry.

The state Senate last week amended the legislation to remove the existing break for newspapers. State Sen. Bob Rucho, a Matthews Republican, told his colleagues there should be no special exceptions for any business when it comes to misclassifying employees as independent contractors. He contended newspapers were guilty of the practice.

The bill resulted from a five-part series in The News & Observer and Charlotte Observer, “Contract to Cheat,” that last year exposed how construction companies were avoiding unemployment taxes and workers’ compensation payments by claiming workers were independent contractors, not employees.

The newspapers’ investigation found that such misclassification in the construction industry alone cost $467 million a year in state and federal tax revenue in North Carolina. The newspapers used documents showing misclassification from construction projects funded by the federal government to estimate tax losses more broadly.

The practice hurts workers as well as honest employers, who often find themselves underbid on projects by competitors who are not paying unemployment taxes, deducting payroll taxes or funding workers’ compensation coverage.

The new legislation sets up a litmus test for when workers should be classified as employees, adds new penalties for violators and creates a new division within the state Department of Revenue to investigate misclassification.

As a result of the flap about newspaper carriers, the bill has stalled in the House, as newspaper publishers lobbied against the carrier provision. They include Orage Quarles III, publisher of The News & Observer. It’s unclear whether the bill will clear the legislature this session.

‘Scare tactic’

The sudden freeze on the legislation has one of its chief sponsors fuming. Rep. Gary Pendleton, a Raleigh Republican, accused newspaper owners of falsely claiming the loss of the break would threaten their businesses.

“That is a scare tactic,” Pendleton said. “Why would the Department of Revenue go single out newspaper carriers? They are clearly independent contractors.”

Quarles said in an interview that carriers fit the definition of independent contractors, and that Rucho is claiming a problem that doesn’t exist. He said he and other newspaper publishers shouldn’t be forced to prove that the carriers are being treated properly.

The Senate initially sought to remove the special designation for carriers as part of its legislation, but the House left it in place. That 2003 law says that carriers can’t be identified as employees if their pay came from the amount charged above the wholesale price.

Key meeting Monday

The law followed a split decision by the state Industrial Commission that a carrier for a Monroe newspaper was entitled to workers’ compensation for injuries suffered in a car wreck while delivering papers.

Rucho was among those who supported the special presumption then. His southeastern Mecklenburg County district shared a border with the Union County district the Monroe paper calls home. The law passed the Senate with one dissenting vote, and drew no opposition in the House, legislative records show.

“I don’t understand why the senator is changing his opinion now, when 13 years ago he thought it was a good law,” Quarles said.

Rucho said he couldn’t explain why he supported the presumption then. He also said he was unaware of any newspaper carriers who complained they had been misclassified. He said no construction employees had complained to him, either.

“Our goal is nobody should get special consideration if they are in any industry,” Rucho said. “Not the newspaper industry, not the construction industry. Not any company that’s operating in a similar manner.”

A second-term lawmaker and retired brigadier general, Pendleton said he introduced the reform legislation after reading the “horror stories” in The N&O about construction workers who were dropped from the job without unemployment insurance or had no health care when they were injured on the job.

He said he was frustrated the bill is now snagged over a dispute about what he largely sees as a non-issue. But he does not think the Senate will pass the bill if the House puts back in the special designation for newspaper carriers.

“They are going to kill the bill if it stays in there,” Pendleton said. “That’s right out of Bob’s mouth to me.”

He has asked Rucho to make his case to House Republicans at a caucus meeting Monday.

Kane: 919-829-4861