North Carolina Legislature Advances Crackdown on Worker Misclassification

Lawmakers in North Carolina are taking very seriously something that's been described as a “cancer eating at the heart" of the construction industry: The misclassification of craft professionals paid as subcontractors when, by law, they should be compensated as employees.

Worker misclassification happens when unethical employers pretend their employees are subcontractors so the business can avoid payroll taxes and benefits that significantly add to the labor costs of companies that follow the law. 

Of course, there are many legitimate uses of contract labor. You can see the IRS test for figuring out how to legally designate workers here. The problem occurs when employers abuse the designation to cut their costs and boost their bottom line by lowering bids on construction projects, making it very difficult if not impossible for law-abiding companies to compete. 

The News and Observer in Raleigh reports on the specifics of the legislation being advanced now in the North Carolina House of Representatives:

Businesses would be required to disclose any misclassification investigations to occupational licensing boards. Licenses would be revoked for failure to disclosure the information.

The bill’s sponsor, Republican Sen. Andy Wells of Hickory, said businesses have a financial incentive to misclassify their workers if they don’t get penalized. Treating employees as independent contractors allows businesses to avoid paying unemployment insurance, worker’s compensation and payroll taxes, and it leaves workers without some employment protections.

“It’s a fairly profitable thing to do, and it creates some problems in the market,” Wells said. “The businesses doing things the right way are completely out of luck. They’re at a competitive disadvantage. You could get to an extreme where the bad guys are the only ones in the market because they’ve driving out everyone else.”

Back here in Texas, former Gov. Rick Perry signed a law back in 2013 to rein in this abuse on taxpayer-funded construction projects around the state.

That year, Construction Citizen garnered national attention for reporting on the way in which the largest homebuilders in the state fought tooth and nail to keep a comprehensive worker misclassification crackdown from happening.

That bill pushed by then-Sen. John Carona, R-Dallas, would have aggressively gone after companies that misclassify their workers with a special focus on construction. The large home builders did not get involved with a smaller bill that was at least a start toward meaningful reform. We chronicled their opposition in a special report, “How Do They Sleep at Night?

The bill now being debated in North Carolina comes after a News & Observer and McClatchy series called “Contract to Cheat” that documented employee misclassification problems across the country. We will keep track of its progress. 

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