Texas House Panel finds that worker misclassification “compromises free markets” and promotes “lawlessness”

A report from a bipartisan panel of Texas lawmakers says companies that pretend their employees are independent subcontractors are undermining free markets and encouraging illegal immigration, among other serious problems. The practice of worker misclassification happens when an employer intentionally skirts the law by paying workers as independent subcontractors when they meet the legal definition of employees and should be paid as such.

Preventing workers from being paid as employees denies them basic protections and costs taxpayers millions each year because employers are avoiding payroll taxes on that labor. Employers who follow the law are investing in a sustainable workforce, which is undermined by worker misclassification. Many of those ethical employers have urged lawmakers to do more to contain what they’ve called “a cancer” in the heart of the construction industry.

So, the Texas House Business and Industry Committee this past year took an in-depth look at the issue, including testimony from construction industry leaders, labor advocates and others who are united in combating misclassification.

The Democrats and Republicans on the committee recommended state government take important next steps to root out employers who cheat. “The 84th Texas Legislature should direct the Comptroller of Public Accounts, with the help of the Texas Workforce Commission, to thoroughly study the economic impact of misclassifying employees on markets, industries, and individuals, and report the findings with recommendations to the Legislature,” their report said.

"The economic incentives to classify a worker as an independent contractor are great, and studies show that a significant percentage of independent contractors are misclassified, and are actually employees,” the lawmakers said. “The impact of misclassification can undermine free markets, damage law abiding businesses, deprive employees of wages and other legal rights, and lessen governmental revenues, thus shifting the burden on to other taxpayers.”

"A misclassifying employer compromises free markets through unfair competition and promulgates lawlessness," the report said.

The report outlines some of the many ways that unethical companies game the system to gain unfair advantages. The top two items in this list should be especially disturbing to anyone who cares about law and order:

• Bypassing verification that employees are U.S. citizens or covered by work visas.
• Enabling noncustodial parents to avoid child support payments by not garnishing wages, thus denying children a better quality of life and perhaps forcing them into taxpayer funded welfare programs.
• Evading labor laws that apply employer-employee relationship, such as paying the minimum wage, paying overtime, and prohibitions against child labor.
• Avoiding the cost of litigation involving civil rights violations for employment discrimination based on age, race, gender, color, religion, or national origin. Avoiding the cost of litigation for sexual harassment violations.
• Depriving some workers of health and pension benefits available to other employees.
• Eluding liability for worker’s injuries suffered on the job, perhaps forcing hospitals and public health programs to pay the cost. Reducing costs for workers compensation insurance.
• Cut costs by not withholding federal income taxes.
• Cut costs by not matching Social Security and Medicare tax payments. Transferring employer costs to employees who must make full Social Security and Medicare payments out of their wages, instead of combining with employer match. Transferring future living and health costs of workers to other taxpayers.
• Avoiding payments for unemployment insurance. Denying employees rightfully earned unemployment insurance, perhaps forcing them into taxpayer-funded welfare programs.
• Denying the various protections for employees who need time off for medical problems or the birth or adoption of a child.
• Avoiding costs associated with administration of payroll.

The Texas Workforce Commission found that in 2013, nearly 30 percent of the companies audited by the agency had “at least one employee who was misclassified as an independent contractor,” the report said. Wages for the wrongly classified employees totaled “more than $174 million, and, as a result, about $2.3 million were owed in uncollected unemployment insurance taxes.” Further, “the result of all types of investigations that lead to finding misclassified employees in 2013 found 60,680 employees who had been misclassified, and more than $8.6 million owed in unpaid taxes.”

One thing that frustrated the efforts of the committee was the fact that they could not find total figures for Texas as investigated by the Department of Labor and the Internal Revenue Service, which have done their own investigations.

The Legislature approved a targeted misclassification crackdown in 2013. This new House committee report said that it is “too soon to determine the effectiveness of the law."

While worker misclassification is rampant in construction, it is prevalent in other industries as well.

Professional Janitorial Services CEO Don Dyer is quoted prominently in this committee’s report as saying “Those of us…who have chosen to run honorable companies are facing a situation where we don't know if we can stay in business.” Dyer was one of the employers who provided memorable testimony to the committee in which he also said his company has chosen not to operate in North Texas because “you cannot do business in Dallas, Texas unless you operate illegally.”

After the report was released, Dyer told Construction Citizen that lawmakers did an excellent job of “outlining the extensive problem and the myriad ways it harms employees and the taxpayers.” Widespread misclassification of employees creates a “general disregard for the rule of law and creates an environment in which many small businesses feel they may be forced to adopt this practice merely to survive,” Dyer said.

But, lawmakers need to go further, Dyer said. “The report does a good job of over-viewing the problem and its seriousness but falls short in exploring or proposing effective solutions,” he said. It makes sense that conservative lawmakers would support efforts to crack down on a practice that undermines free markets, promotes lawlessness, and potentially puts more people on the welfare rolls.

Here is the full report from the committee. The portion on misclassification starts on page 44.