To help NC businesses, end the misclassification fraud

As a business owner, I am glad this General Assembly claims it is more “business friendly” than any in past memory. However, one major issue facing law-abiding North Carolina businesses requires real action by the legislature.

Treating employees as independent contractors when in fact they are regular employees is a fraudulent business practice that has become an epidemic. Some call this “misclassification,” but it is in fact fraud that lets these cheating businesses – many from out of state – off the hook for basic protections, including minimum wage, overtime pay, workers’ compensation, health and safety protections, unemployment insurance, federal and state tax withholding, social security withholdings and matching and more.

This fraud is a growing problem that harms workers, puts a strain on government resources and provides an unfair advantage when these unscrupulous employers compete with law-abiding businesses. I see it every day. Other legitimate business owners see it, too, when they are regularly underpriced for jobs and there is no other explanation for such bids other than cheating. When cheating businesses classify employees as independent contractors to reduce labor costs, legitimate business and workers alike lose out.

The harm being done to my business and others is serious. Businesses have gone under as a result of this problem. The once foreign idea of cheating is now becoming an option that businesses are considering, and this will continue unless the General Assembly enacts real reform.

Taxpayers are also harmed. Misclassified workers aren’t covered by worker’s compensation, so on-the-job injuries become the taxpayers’ responsibility if the worker doesn’t have health insurance. An in-depth investigation by News & Observer showed $467 million in state and federal taxes are lost each year in N.C. from misclassification fraud in the construction industry alone.

Truly effective legislation would tackle misclassification fraud, ensuring that the risks and penalties of using such fraudulent practices outweigh the advantage and profit that result from cheating. Serious enforcement must change the current model. Several bills attempting to deal with this matter have been introduced in the House and the Senate. It seems SB 694, introduced by Sen. Buck Newton of Wilson, and HB 482, introduced by Rep. Gary Pendleton of Wake, are the bills that may end up being enacted. While both of these bills are a step forward, they fall short in several serious ways.

SB 694 and HB 482 both include loopholes and definitions that allow the cheaters to continue to beat the system.

Penalties are weak in both bills and are assessed only when a business is caught a second time cheating. Effective legislation should at least increase the range to Florida’s levels – up to $5,000 in penalties for each misclassified employee – and should link the amount of any penalty to the willfulness and severity of violations. No one wants to punish honest mistakes, but we should want to stop businesses that know better from continuing to cheat.

Legislation must include “stop work orders,” a proven tool used in Florida for years to great effect. As in Florida, authority should be given to the N.C. Industrial Commission to issue “stop work orders” when businesses do not properly provide workers compensation coverage. Once coverage is obtained through most local insurance companies, work can start up again. This is a system that has worked in Florida because businesses there understand the incredible risk they run if they want to save money by not having workers’ compensation coverage for their workers.

Any laws our legislators pass must ensure that cheating business owners cannot start up new businesses to avoid penalties. They should also outlaw third-party assistance to businesses operating with the intent of committing misclassification fraud; provide for occupational licensing boards to have authority to revoke, suspend or deny licenses because of misclassification fraud (and to conduct audits of licensees as part of enforcing the law); and make any business caught cheating not only ineligible for contracts with state and local governments, but also for any projects receiving state or federal resources. The News & Observer’s investigation found one such program, the federal Low Income Housing Tax Credit program, contained extensive cheating through misclassification.

“Business friendly” does not mean allowing businesses to cheat their competitors, hurt their employees and shift millions of dollars in costs to North Carolina’s taxpayers. It is not the time to pass a misclassification bill just to allow the government to check it off a list of accomplishments. There needs to be a concerted effort in both the House and Senate to make sure this bill will be enforced and will eliminate this growing fraud.

Doug Burton is owner of Whitman Masonry, Inc. in Raleigh.