Contract to Cheat: Followup

Bill to curb tax, labor cheating likely buried for this year

Southern Mechanical, a Nashville, Tenn. based heating and air conditioning firm, installed dozens of units at this private apartment complex near Brier Creek in Raleigh. Southern Mechanical is one of hundreds of companies who improperly treat workers as independent contractors.
Southern Mechanical, a Nashville, Tenn. based heating and air conditioning firm, installed dozens of units at this private apartment complex near Brier Creek in Raleigh. Southern Mechanical is one of hundreds of companies who improperly treat workers as independent contractors. 2014 News & Observer file photo

A bill aimed at curbing the illegal practice of companies treating workers who should be employees as contractors stalled Tuesday as legislators prepared to adjourn.

The legislation had been introduced because of investigative reporting last year by the state’s two largest newspapers. It was sent back to committee Tuesday because of a dispute between a prominent senator and newspaper publishers.

The sticking point: an exemption lawmakers granted to newspaper companies 12 years ago that allowed them to continue treating carriers as independent contractors.

State Sen. Bob Rucho, a Matthews Republican, led the charge earlier this month to strike the 2003 employment exemption for newspaper carriers. And his legislation appeared to go farther, directing that carriers should receive workers’ compensation and unemployment benefits.

House members faced two choices Tuesday as they tried to wrap up final business. Either they could concur with Rucho’s demands, or let the bill die for the year.

Rep. Gary Pendleton, a Raleigh Republican who sponsored the bill, said he had to admit defeat when many of his colleagues said they were getting pressure from their hometown publishers. He reluctantly agreed to send the bill to the House Rules Committee, where it could be revived next year.

Newspaper executives “wanted to keep their turf and, in turn, effectively killed a bill that would have done a lot of people a lot of good,” Pendleton said. Last week, he said that the state Department of Revenue would not single out carriers because “they are clearly independent contractors.”

The legislation was designed to address a massive labor scheme investigated by The News & Observer and The Charlotte Observer in a five-part series last fall. Contract to Cheat detailed illegal employment practices that rob the state and federal government of at least $467 million in tax revenue each year in the construction industry alone.

The practice put workers in a vulnerable position, forcing them to work dangerous jobs without protections of insurance in case they were laid off or injured. Honest employers couldn’t compete against competitors able to shave 20 percent or more off labor costs by treating workers as contractors because they didn’t withhold taxes from employees’ paychecks or pay unemployment taxes or workers’ compensation.

The legislation would have added new penalties for misclassification and created a new division within the state Department of Revenue to investigate; it had enjoyed support from unusual allies and across party lines. Business interests joined worker advocates to help push the bill.

Rucho, a frequent critic of the state’s largest newspapers, made two changes that altered the bill’s path. One eliminated the 2003 exemption for newspaper carriers to be independent contractors; the other did more than strip away the exemption. It would appear to have directed newspapers to provide workers’ compensation and unemployment insurance for carriers – two benefits typically required for employees.

Pendleton said that the measure did not deem the carriers employees, but left the question open for the courts as it had been for other industries. In other states, such as California, newspapers have litigated about whether carriers are employees.

On Monday, an email was distributed to members of the North Carolina Press Association urging members to come to Raleigh “to help ensure this bill does not progress farther this year.”

Press association leaders perceived that Rucho’s additions to the bill were punishment for editorials critical of Republican leaders’ work in the General Assembly. Pat Taylor, president of the North Carolina Press Association, applauded the House for refusing the adopt new provisions aimed at the newspaper industry.

“We think it was targeting us,” said Taylor, who works for The Pilot in Southern Pines. “At the 11th hour, it became something else. We felt like we were defending what we should defend.”

Still, on Tuesday, some of bill’s other supporters felt stung by the newspaper industry’s efforts to kill the bill. Worker advocates had tried to lobby for laws that would combat misclassification for years without success; the newspapers series had pushed it to the forefront.

“The amount of effort to kill this bill has been annoying. It was a perfect storm,” said Bill Rowe, a lobbyist for the North Carolina Justice Center and worker advocate. “It’s like, wait a minute, if [newspapers] get an exemption, everybody would want an exemption. I’m sure the home builders would love an exemption, too.”

Newspaper industry leaders secured an employment exemption for carriers in 2003 after a delivery person in Monroe was injured in a car crash. The state Industrial Commission ordered the local newspaper to pay workers’ compensation benefits to the carriers, but the company had not purchased insurance because it considered the driver to be a contractor.

Lawmakers agreed to write into law the carriers’ status as contractors to relieve newspapers of the uncertainty of another unexpected workers’ compensation payout.

All but one legislator voted for the carve-out for carriers in 2003, according to legislative records. Even Rucho, who has led charges to strike the exemption, voted for the carve-out 12 years ago.

He called the newspaper industry’s desire to keep the carve-out “hypocritical” and accused the industry of wrongly treating carriers as independent contractors.

“The fact of the matter is you can’t go out and tell people that they’re doing wrong and you’re doing wrong, but you’re okay and they’re not,” Rucho told the N&O last week.

The legislation isn’t completely dead for this session until legislators adjourn. Legislators could also take up the bill again next year, but Pendleton said he wasn’t sure he would try again.

“Unless newspapers are willing to give up that provision, I don’t think anyone will go for it,” he said.

Staff writer Dan Kane contributed to this report.

Locke: 919-829-8927 or @MandyLockeNews

The carrier question

Why do newspapers treat carriers as independent contractors?

Newspapers have long considered the people who deliver the daily paper to be contractors, not employees of their company.

Many carriers deliver for several publications and often tailor their hours to accommodate other employment. Some work on a fee per paper delivered. These factors lean toward a lesser amount of control – the test when deciding whether a worker is an employee.

Larger newspapers such as The News & Observer and The Charlotte Observer contract with third-party vendors that provide the actual carriers. Smaller papers often rely on several delivery people they contract with directly.