Worker misclassification

Department of Labor Wage and Hour Division administrator David Weil figured Paul Johnson Drywall Inc. had “kind of seen the light” by the time the company’s case was settled.

The Arizona-based company agreed in May 2014 to pay $600,000 in back wages, overtime and penalties to more than 445 current and former employees. The decision came after a DOL investigation into worker misclassification – an expansive and complex issue that has many labor organizations offering different opinions on the matter.

Worker advocates say misclassifying employees as independent contractors allows employers to shirk responsibilities for providing government-mandated worker protections, including overtime pay, family and medical leave – and a safe and healthy workplace.

“Shortchanging workers, failing to provide safe conditions … that is a low road that just brings everything down,” said Debbie Berkowitz, a longtime labor official who now works as a senior fellow at the National Employment Law Project, a New York-based national advocacy organization for the employment rights of lower-wage workers.

Brian Turmail, spokesman for the Associated General Contractors of America, said bad business relationships can ultimately hurt workers.

“Any time that you are engaged in inappropriate business relationships with workers, it undermines safety because it creates a level of separation between the employers and their workers,” Turmail said.

Construction and beyond

The construction industry is a prominent one for misclassification, according to a March 2015 OSHA and DOL report, “Adding Inequality to Injury: The Costs of Failing to Protect Workers on the Job.” The report cites research from McClatchy Co., a Sacramento, CA-based newspaper group, which used a Government Accountability Office report that shows more than 500,000 construction workers in Texas, North Carolina and Florida were misclassified as independent contractors in 2009.

Further estimates in the report state that misclassification affected 37.7 percent of all Texas construction workers, 35.2 percent of those in North Carolina and 15.5 percent of workers in Florida.

However, misclassification is “a problem that has spread to a lot of other industries,” including janitorial and ride-sharing services, Weil said.

Although officials struggle to pinpoint the first case of misclassification, they agree it has become most pervasive within the past decade. The Wage and Hour Division issued its first national press release on worker misclassification in April 2010, but studies on the subject date back to the 1990s, Berkowitz said.

The issue, which violates the Occupational Safety and Health Act and the Fair Labor Standards Act, presents numerous roadblocks when it comes to research, OSHA administrator David Michaels told Safety+Health. Analyzing payroll records has proved beneficial in past cases, and a growing number of state-level task forces have studied unemployment insurance and workers’ compensation data. Still, experts claim studies most likely fall short in capturing the true scope of worker misclassification because audits seldom identify workers who are paid off the books.

Berkowitz, whose past affiliations include OSHA and the AFL-CIO, said some employers require workers to sign documentation identifying an employee as an independent contractor. This affords the employer several advantages over a law-abiding counterpart, including classification of a worker as independent rather than an employee for tax purposes. Payroll and contract bidding strategies are among the many financial areas impacted.

But simply signing such an agreement does not make someone an independent contractor, officials warn. Past industry practice, working lawfully as an independent contractor under a previous employer and receiving a 1099 tax form also do not guarantee independent contractor status.

‘Less likely to invest in safety’

Worker safety can suffer as a result of misclassification, according to Michaels. In the OSHA/DOL report, he identified two processes in which work injuries increase via misclassification:

“First, by misclassifying wage employees as independent contractors, employers do not have to worry about the OSHA requirement to provide a safe workplace, since the OSHA law does not cover the self-employed. Second, these employers avoid paying workers’ compensation insurance premiums (as well as unemployment insurance and other benefits and taxes). The misclassifying employer is no longer concerned about workers’ compensation premiums rising following a work injury, so is less likely to invest in safety,” Michaels said.

Weil said accurate injury rate data is lacking because “employers don’t keep track of injuries in the workers who they’ve misclassified.” He went on to say that employees are the ones who ultimately get shortchanged. “You’re saving yourself a lot of money and you’re costing your employees the opportunity for several important, vital benefits,” he said.

Solution strategies on the rise

Berkowitz said the Obama administration has paid more attention to misclassification enforcement as concern has escalated. At press time, 35 states had entered into three-year Memorandum of Understanding agreements with the Wage and Hour Division to protect workers from misclassification. The division works under an MOU with the Internal Revenue Service while providing outreach services to employees, employers and worker advocate groups.

Upcoming legislation also figures to help combat misclassification. Michaels lauded DOL and Federal Acquisition Regulatory Council guidance resulting from Obama’s Fair Pay and Safe Workplaces Executive Order, which requires employers who bid for federal contracts worth at least $500,000 to disclose a company history of labor violations cited during the past three years. At press time, the first phases of the final rule were set to go into effect on Oct. 25.

“I think state legislature – and I think the public – is waking up to the fact that everybody is losing when [misclassification] happens,” Berkowitz said. “And it makes sense to put more money into enforcement, because in that case, everybody wins.”