Homebuilders Ask Congress to Intervene in Labor Misclassification Fight

Originally published by: Wall Street JournalJune 4, 2015

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Home builders and other employers that rely heavily on independent contractors have asked Congress to stop the Labor Department from awarding grants that are used to investigate suspected misclassification of workers as contractors rather than employees.

In recent years, the Labor Department has become more aggressive in its efforts to ensure that companies accurately classify workers and is specifically targeting “sectors where we know workers are vulnerable and violations are rampant,” said a Labor Department spokesman. Officials have said that worker misclassification allows offending companies to avoid paying certain taxes, undermines compliant employers and deprives workers of overtime pay, unemployment insurance and other benefits.

Many large companies, including those in technology, construction, transportation and other industries, classify workers as independent contractors because the workers’ specialized skills are needed on an on-demand basis rather than full-time. Federal and state regulators, however, sometimes allege that employers classify workers as independent contractors to avoid paying them the benefits due full-time employees and to avoid paying taxes that must be paid on behalf of full-time employees to fund programs such as unemployment insurance.

Last year, the Labor Department started awarding $10 million in annual grants to state labor regulators to focus more attention on worker misclassification. A portion of the grant money is awarded as bonuses to states that show gains in detecting such violations.

But a coalition of trade associations whose members are heavy users of contractors—including the National Association of Home Builders, American Trucking Associations and American Bakers Association—say their companies use specialized craftsmen on an intermittent, on-demand basis, which leads to hiring them as independent contractors when needed rather than as full-time employees.

Whether workers are contractors or employees is a contentious issue in multiple industries, and businesses say the line in determining the difference between the two can be fuzzy. Generally, businesses are supposed to use several factors to determine how to classify a worker, including their degree of control over the person.

“To force small-business people to have full-time employees on each and every crew that builds a home would be to force those people out of business or drive up the cost of housing to where it would be unaffordable to most Americans,” said Jerry Howard, chief executive of the NAHB.

In a letter sent last month to top lawmakers, including Senate Appropriations Committee Chairman Thad Cochran (R., Miss.) and House Appropriations Committee Chairman Hal Rogers (R., Ky.), the coalition argued that awarding such grants encourages state workers to “find misclassification where none exists.” The group is urging Congress to reject the Obama administration’s request for $10 million for the grants in fiscal year 2016.

According to a Labor Department spokesman, the primary uses of the grant money are for states to hire additional staff to audit companies, to improve technology and processes for determining which companies warrant audits and for education programs to inform employers of how to properly classify workers. He added that the Labor Department “has detected misclassification” in several industries, including construction, nursing and home care, hotels and janitorial and security services.

Labor Secretary Thomas Perez and his predecessor in the Obama administration, Hilda Solis, often have mentioned targeting worker misclassification as a priority. On a Labor Department blog post in April about the settlement of a large worker-misclassification case in Arizona and Utah, Mr. Perez wrote that “employers can’t hide behind deceptive legal partnerships to cut corners and save money on the backs of their employees. It’s our hope that this and other enforcement actions will serve as a credible deterrent that influences behavior throughout the country.”

In that case, one of the largest misclassification cases the Labor Department has settled, several contractors agreed to pay up to $1.3 million in back wages and civil penalties. The department says those wages are owed to more than 1,000 workers wrongly classified. The contractors neither admitted nor denied the government’s allegations against them.

Contractors involved in the case included Universal Contracting LLC, CSG Workforce Partners LLC and Paul Johnson Drywall LLC. In the past year, many have made their workers full-time employees. Paul Johnson Drywall President Cole Johnson said his company is now fully compliant with federal guidelines.

The Labor Department launched a broad probe in 2011 into the pay and worker-classification practices of several large builders, including PulteGroup Inc. and D.R. Horton Inc. No findings or penalties in that probe have been announced.

Whether specific grants have resulted in increased audits isn’t clear. Maureen Cregan Connolly, executive director of the Home Builders and Remodelers Association of Northern Vermont, said “just about everybody in our directory” has been audited by the state’s labor department for worker classification within the past year.

Vermont Labor Commissioner Annie Noonan said that no such increase has occurred. Vermont conducted 2,601 audits last year and 2,620 in 2013, which is on par with the department’s long-term average, she said. Ms. Noonan added that the $500,000 Vermont received last year from the federal-grant program went to educational efforts to help employers properly classify workers.

Bob Schwartz, who owns Great Northern Construction Inc. in Burlington, said Vermont auditors have been more aggressive of late. His company was fined $15,000 by the state in August after an auditor determined that two of his subcontractors should be classified as full-time employees. He said he thought they qualified as independent contractors.

Mr. Schwartz is appealing the ruling, but the fine is accruing interest as the appeal with the state runs its course, he said. Great Northern has six to eight full-time employees and hires independent contractors as needed. It has incurred $12,000 in legal fees on the appeal, he said.

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