|
Legislation targets misuse of independent contractors
While having the roof on your house replaced, a worker illegally classified as an "independent contractor," falls and is injured. Currently, you could be liable for that worker's injuries, but legislation moving forward at the Capitol would prevent such situations. H.F. 1283, sponsored by Rep. Mike Nelson, DFL-Brooklyn Park, would crack down on the increasing misclassification of construction workers as "independent contractors." Companies must pay Social Security and payroll taxes and provide workers' compensation and unemployment compensation insurance for employees – but not for "independent contractors," who are presumed to be self-employed.
Legislation targets misuse of independent contractors
By Michael Kuchta and Barb Kucera
13 March 2007
| ST. PAUL - While having the roof on your house replaced, a worker illegally classified as an "independent contractor," falls and is injured. Currently, you could be liable for that worker's injuries, but legislation moving forward at the Capitol would prevent such situations. |
H.F. 1283, sponsored by Rep. Mike Nelson, DFL-Brooklyn Park, would crack down on the increasing misclassification of construction workers as "independent contractors." Companies must pay Social Security and payroll taxes and provide workers' compensation and unemployment compensation insurance for employees – but not for "independent contractors," who are presumed to be self-employed.
Many of these so-called "independent contractors" are really employees, Nelson testified at a Minnesota House hearing Monday. They don't carry their own workers' compensation insurance, for example, so if they were injured repairing a home, "you as a homeowner are liable for that person being hurt," he said.
Illegal misclassification also is cheating the state budget of millions of dollars in revenue, and opening the door for additional illegal activity, such as wage-and-hour violations and use of undocumented workers, the bill's sponsors said.
The practice "is plainly illegal and widely acknowledged as a problem in the construction industry," Kyle Makarios, political director for the Lakes & Plains Regional Council of Carpenters, testified at the House hearing. However, no mechanism exists to enforce the law against misclassifying workers.
 |
|
Misclassification "is plainly illegal and widely acknowledged as a problem in the construction industry," Kyle Makarios, political director for the Lakes & Plains Regional Council of Carpenters, testified at the Legislature.
Photo by Michael Kuchta | Nelson's legislation would require any construction worker claiming to be an independent contractor to register with and receive certification from the state. Contractors could not hire workers as independent contractors unless they have state certification. Contractors also could not coerce workers into filing for independent contractor status.
The state will certify workers as independent contractors only if they pay a $150 registration fee and demonstrate they meet all nine of the requirements in current law that distinguish independent contractors from construction employees.
Legitimate contractors can't compete
Misclassification is widespread and growing, especially in fields such as drywall, roofing, and floor covering. A Harvard University study in Massachusetts and Maine found that as many as 24 percent of construction workers are illegally misclassified.
"Particularly in the residential marketplace, the misclassified worker is our single greatest barrier to wage increases," said Scott Malcolm, executive secretary-treasurer at the Regional Council. "It's making it incredibly difficult to compete. And when our contractors can't compete, our members don't work."
Bill Becker, of Becker Brothers Inc., a union floor-installation contractor, told a Senate committee that his company lost an estimated 30,000 hours of work in the last three years because competitors are undercutting area wage-and-benefit standards by using so-called independent contractors.
John Nesse, attorney for the Minnesota Drywall and Plaster Association, Minnesota Floor Covering Association and other construction employer groups, told another Senate committee: "My contractors lose a lot of jobs to illegitimate independent contractors.… I think there's a unanimous belief that the problem is growing and must be stopped, or at least slowed down."
By taking advantage of loopholes in the law and illegally labeling workers "independent contractors," employers can save 30 percent or more in out-of-pocket costs, says Sen. Tom Bakk, one of the legislation's sponsors in the Senate.
Cost to taxpayers
When companies misclassify workers and avoid taxes, everyone else pays, Nelson said.
"It's costing the state government lots of money," he told the House Consumer and Labor Division. Minnesota loses $604 million annually in uncollected income taxes, according to a 2006 report by the Office of the Legislative Auditor. Most of the lost revenue is from unreported or under-reported income by self-employed workers, the report says.
Often independent contractors – whether legally classified or not – significantly under-report their income. Independent contractors typically report only 68 percent of their income, according to the Internal Revenue Service. Employees, on the other hand, report 99 percent of theirs.
The Minnesota Department of Revenue told the Star Tribune last year of one roofing company that paid workers $8 million. Those workers – all independent contractors – reported only $2 million of their income.
Two other bills proposed during the current legislative session address the misclassification of workers:
• HF 879 and SF 820 would require contractors to withhold 2 percent of the payments they make to independent contractors. That is similar to the income-tax withholding now made on employees' paychecks. The withholding requirement would help the state track workers who are cheating on taxes.
• HF 517 and SF 415 would require contractors to send copies of federal 1099 forms to the Minnesota Department of Revenue. This also would help the state cut down on under-reporting of income by making it easier to track workers.
Reported by Michael Kuchta, editor of Lakes & Plains Carpenter magazine, and Barb Kucera, Workday Minnesota editor.
| |
Home 
