July 1, 2011

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Demoted

New Laws Clamp Down on Worker Misclassification

Tom Haraldsen

July 1, 2011

Imagine being an employer in a very competitive trade such as construction. The best workers and most skilled laborers are in heavy demand. Like everyone else, your workers want to make as much money as possible, and you as a business owner want to maximize your investment.

Now, imagine if your best efforts were thwarted by a competitor who was cheating—both you and the system. You won’t have to imagine very hard—it’s been going on in Utah for years.

Misclassification of workers as “owners” in order to avoid paying payroll tax and workers compensation premiums has been a challenge in Utah’s construction industry in particular. This problem was finally addressed by passage of two bills during the 2011 Utah State Legislature.

Playing by the Rules
Sen. Karen Mayne (D-West Valley, Kearns) introduced and successfully led the fight for passage of SB 11—Worker Classification Coordinated Enforcement, and SB 35—Construction Licensees Related Amendments. Her goal was simply to level the playing field for contractors looking to hire construction workers.

“I’ve known for a long time that there have been issues with misclassification,” Mayne says. “With the recession really hurting many in the construction trades, I was getting calls from employers who really needed help to protect their businesses and make sure everyone was playing fair.”

Case in point: a small construction company, needing laborers, hires them as “owners,” meaning neither party has to pay for unemployment insurance or into the Workers Compensation Fund. That same employer may also choose not to deduct taxes, telling the laborer that “you’re smart, you’ll pay your taxes.” On the surface, this move circumvents the financial requirements of both the worker and his or her boss to pay into those funds, thus making for larger take home paychecks. At a time when that laborer might be desperate to support a family, the arrangement seems attractive, and they take the position.

This deliberate misclassification of a laborer has allowed unethical companies to have a huge advantage in hiring workers away from contractors who have worked within the law.

Not any more. SB 35, a 59-page, highly scrutinized new law that was debated and amended a couple of different times before its passage, defines what constitutes those considered employers enumerated, those who are regularly employed and those who are statutory employees. It lays out the elements and penalties involved in workers compensation fraud. Perhaps most importantly, it sets this standard of proof in place for true “ownership” in a company: that an employee-owner must “directly or indirectly hold at least an 8 percent ownership interest.”

Moving Forward
“For our industry, we view both of these bills as a good thing,” says Rich Thorn, president and CEO of the Association of General Contractors of Utah. “We’ve wanted this kind of legislation for some time, to make sure both employers and their employees are treated fairly.”

Mayne points out that construction workers in particular “need workmen’s comp, and all employers should be paying their fair share for that as well as unemployment insurance.”

Thorn adds, “I applaud Sen. Mayne for doing this. It brought a broad group of people together to get this done and into law. Wordsmithing on these bills was critical to accomplish what we were after.”

As always, there are some in the arena who disagree with the legislation, including a few employment attorneys contacted for this story who were reticent to discuss it, at least on the record. One exception was a Salt Lake attorney, wishing to remain anonymous, who states that “in all fairness, this practice [of misclassification] has been going on for years, and not just in construction. These bills really give guidelines that should have been in place without having to have them written into law. This should keep everyone coloring between the lines.”

SB 11 sets up the mechanism to assure that they do. The Workers Classification Coordinated Enforcement Council, an overseer for the provisions of SB 35, will consist of shareholders in the effort including the council’s commissioner, the executive directors from the Department of Commerce and the Department of Workforce Services, and the chair of the state tax commission.

“The biggest change is the ability of an employer to demonstrate ownership,” Thorn says. “We’ve seen too many companies losing employees to others who are not following the model, and that should stop now.” 

“It was simply an effort to make sure no one loses their ability to hire and retain good people,” Mayne says. “We heard from those who needed help, and we helped.”

 

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