Will workplace fraud reforms be stopped just short of the goal line?

Will workplace fraud reforms be stopped just short of the goal line?


Despite overwhelming bipartisan support, legislation to crack down on cheating employers has mysteriously stalled

It may sound surprising coming from one of the North Carolina General Assembly’s most frequent critics, but in a legislative session marked by ideologically-driven moves to:

there have actually been some bright and important areas of common ground and bipartisanship. One of the most notable and potentially far reaching involves efforts to clamp down on outlaw businesses that cheat their workers, taxpayers and competitors by not following basic norms of employment law.

Workplace fraud (aka “misclassification”)

As you may recall, the issue of what is often referred to as “worker misclassification” was first documented at length last year in a special series of reports in Raleigh’s News & Observer entitled “Contract to Cheat.”

Here’s how the N&O put it at the time:

“It’s a tactic that costs taxpayers billions of dollars each year. Yet when it comes to public projects, government regulators have done nearly nothing about it, even when the proof is easy to get.

The workers don’t have protections. The companies don’t withhold taxes. The regulators don’t seem to care.”

You can watch a video in which one of the chief authors of the series, reporter Mandy Locke, explained the issue at an NC Policy Watch luncheon in January by clicking here.

And here’s how Wake County businessman Doug Burton explained the problem in a follow-up op-ed this spring:

“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.”

In other words, the basic idea is this: scads of North Carolina employers are ripping off their workers, the taxpayers and the economy as a whole by treating men and women who should be classified as employees as independent contractors. The workers lose out on all sorts of important protections. State tax coffers lose out on millions and millions of dollars in revenue. And competing companies that play by the rules lose out on all kinds of business because they aren’t playing on a level playing field.

Legislative responses    

To their credit, lawmakers in both houses of the General Assembly have responded during the 2015 session with promising legislation that would target many of these problems.

The Senate introduced a bill in March (Senate Bill 694 — the “Employee Fair Classification Act”) and passed it unanimously at the end of April. Under this legislation, “misclassification” would quite explicitly be made unlawful and a regime would be established to enforce the law’s prohibitions. The legislation comes complete with fines for bad actors and the establishment of a new division within the Office of State Budget and Management (the “Employee Classification Division”) that would be charged with, among other things, receiving complaints, launching investigations, assessing penalties, developing training programs and coordinating actions amongst various agencies.

Meanwhile, the House, as is generally its wont, took a slightly more deliberate approach. The bill it took up (House Bill 482 — also known as the “Employee Fair Classification Act”) was introduced in early April and then subjected to a lengthy series of committee and subcommittee meetings. Ultimately, the bill passed the House in mid-August by overwhelming votes of 93-20 and 90-15. Like the Senate version, the House measure takes the important step of making “misclassification” a prohibited act and setting up a penalty and enforcement scheme.

Unlike the Senate version, the House would locate the enforcement division in the Department of Revenue. In addition and importantly, the House bill would also appropriate approximately $300,000 per year to the Department for the next two years to carry out the enforcement duties. The bill specifies that:

“The Department of Revenue shall consult with the Industrial Commission, the Office of State Budget and Management, the Division of Employment Security of the Department of Commerce, and the Department of Labor in hiring staff for this function.”

A sudden and unexplained disappearance

Unfortunately, despite all the hard work and progress hammered out over the past several months by lawmakers, representatives of the Governor, advocates for business (including the North Carolina Chamber, and the N.C. Home Builders Association) and workers (including the state AFL-CIO and the North Carolina Advocates for Justice), the issue has suddenly and rather strangely disappeared from the radar screen in recent weeks.

This has been especially obvious in the Senate where, in a quite unusual step, Senate leaders have left the House bill dangling and in a state of limbo in the Senate clerk’s office for the past two weeks rather than assigning it to a committee. (In the House, the Senate version has been left sitting in the Rules Committee since April, but, of course, the House has devoted several weeks of action to its own version since that time.)

As a practical matter, therefore, even though most lawmakers have been notably short of things to do in recent weeks while legislative leaders have negotiated the details of the state budget behind closed doors, both misclassification bills are now stuck in a state of suspended animation. Though virtual mirrors of each other in most important aspects and supported by overwhelming majorities of both parties, neither seems positioned to be taken up anytime soon.

Unfortunately, but not surprisingly for the current leadership of the General Assembly, the reasons behind the sudden silence on the misclassification issue are a mystery. Whether it’s a matter of a simple battle for credit between the House and Senate sponsors, genuine differences over the details of the two versions or, most worrisome, the emergence of behind-the-scenes opposition from some powerful and moneyed special interest(s), the public has received zero explanation as to why this important and largely agreed upon legislation is now in jeopardy.

A rare opportunity

Let’s hope the hold-up in the final consideration of this proposal is temporary and that lawmakers don’t leave Raleigh without having addressed the issue. Though neither proposal is as strong as a lot of worker advocates and honest businesses would like to see (click here to read a critique written earlier this summer by veteran Raleigh attorney Leonard Jernigan), it’s still not often that groups as varied as the NC Chamber and the AFL-CIO reach any kind of agreement on any issue – much less one as important as this.

By any fair assessment, either proposal would be an improvement over the current law and a good start toward addressing the problem. Surely, legislators won’t waste such a rare opportunity.