Constructing a Cheaper Classification of Workers

“A contractor who doesn’t do it right can bid lower than those who do.” – Louisiana Legislative Auditor Daryl Purpera

From the time in early 2016 that newly-minted Gov. John Bel Edwards signed his first executive order accepting Medicaid expansion, arch-conservatives in the state legislature have been sounding alarms over purported fraud in the program. And when Louisiana Legislative Auditor Daryl Purpera addressed the Baton Rouge Press Club on Monday, June 24, he didn’t hesitate to wax eloquent on that topic. In particular, Purpera reiterated his “need” to access taxpayer-specific Department of Revenue information. The Revenue Department has refused to provide that data, and presently the Auditor is suing them for it, asking the courts for a declaratory judgment that will authorize release of the information.

In addition to the cause celebre of alleged Medicaid fraud, Purpera also had a few things to say about a new performance audit issued earlier in the day, which looks at how the Louisiana Workforce Commission is handling the problem of “misclassified workers”.

“Our audit samples, covering 2014 through 2018, showed employers misclassifying workers failed to pay nearly $3-million in unemployment taxes,” Purpera told the Press Club. “In addition, they failed to collect and remit an estimated $9-million of state income tax from these workers.”

This isn’t about putting someone on the payroll as a receptionist when she is actually performing the duties of a secretary, to cover up for paying her less. Nor is it about designating a busboy as a waiter, so that instead of paying him $7.25 per hour, you can get away with paying him just $2.13. Instead, as stated in the audit, “Worker misclassification occurs when an employer improperly classifies a worker as an independent contractor instead of an employee.”

An employee is subject to payroll withholding of taxes, and is eligible for employment benefits such as insurance. An independent contractor is instead paid a flat amount, and is responsible for paying his or her own taxes and/or insurance.

“This is pervasive in some industries,” Purpera stated. “Construction particularly.”

Federal law requires each state’s labor agency to annually audit one-percent of all employers and one-percent of total employee wages, and this report notes the Louisiana Workforce Commission is in full compliance with that rule. In fact, LWC is ranked 2nd in the nation for its employer audit program. This legislative audit also states LWC consistently found the more misclassified workers within construction companies than within other types of employers: on average, 12 workers for each construction firm audited. From 2016 through 2018, 453 audits of construction companies (15.4% of the total number of employer audits reviewed) revealed 5,493 misclassified workers (or nearly 42% of all the 13,106 workers determined to be misclassified.)

But LWC only conducted 2.3% of their total employer audits based on fraud tips or referrals from other agencies. They looked into the records of 66 employers, and lo and behold! 2,346 workers were shown as “independent contractors”, instead of employees. That averages out to uncovering nearly 36 misclassified workers per completed audit. In other words, there was some truth to those tips, and the Legislative Auditor’s office is recommending the Workforce Commission “strengthen how it selects employers to audit.”

Purpera phrased it as, “They’re not doing risk-based auditing, and they need to do that.” The written report on the LWC audit summed it up succinctly: “We found that audits initiated on tips and referrals, as well as audits of construction companies, generated the highest number of misclassified workers.”

The increasingly common practice of using “labor brokers” to fill out work crews on industrial construction projects appears to be an increasingly major contributing factor to misclassification.

Somewhat like the construction industry equivalent of “temp agencies” for office workers, Purpera explained, “Louisiana started seeing an influx of this after Katrina and Rita. These brokers from out of state hire unskilled or semi-skilled labor, and offer them to the contractors here, fifty to a hundred workers at a time. The construction firms list them as ‘contract laborers’, not ‘employees’.”

And though those workers answer to, and are directed in the performance of their duties by, the construction contractor (one of the definitions of “employee” in Louisiana state law) they’re not put on the payroll and the construction contractor doesn’t have to withhold taxes or provide benefits for these workers.

“Labor costs are 20 to 30 percent less under these deals than for those contractors playing by the rules.” Purpera explained. “And a contractor who doesn’t do it right can bid lower on jobs than those who do go by the rules.”

Although state law says employers determined to have willfully misclassified workers (emphasis ours) are prohibited from contracting, directly or indirectly, with any state agency or political subdivision of the state for a period of three years, this legislative audit notes, “Louisiana law does not impose liability on contractors for misclassification of workers hired by labor brokers.”

That’s right. If LWC discovers workers employed through labor brokers are categorized by construction firms as “independent contractors” but are de facto employees, the state’s labor department can’t do anything to the construction firm. It’s a legal loophole big enough to drive a bulldozer through.

The only recourse is to go after the labor brokers. To do that, LWC must first audit them. This report remarks that “according to LWC, labor brokers often dissolve their companies and reorganize under new names” to avoid audits and/or penalties. As a result, “LWC is unable to hold anyone accountable for these instances of worker misclassification.”

This performance audit also points out another major barrier to effective enforcement the requirement to just send a warning letter for an employer’s first offense. In order to fine an employer for doing this, LWC must wait a year and then perform a follow-up audit that shows workers are still being misclassified. Then an employer can be fined up to $250 for each misclassified employee. After that (and after yet another year and yet another audit), the fine goes up to $500 per worker.

According to this audit, as of January 2019, LWC had conducted only 10 follow-up audits on previously warned employers, finding six employers still out of compliance, and collecting just $21,250 in fines. If fines could be imposed immediately at first offense, the 13,106 misclassified workers documented from 2016 through 2018 would have instead resulted in $3,276,500 in fines.

In 2016, Rep. Patricia Smith (R- Baton Rouge), authored a bill on LWC’s behalf. It would have deleted the warning letter requirement, and allowed fines of up to $5000 per misclassified employee on the first offense. On a second offense, the fine would go up to $10,000 per individual, and subsequent offenses would cost the employer $25,000 per person. If the same person is determined to be a repeatedly misclassified employee, that employer could be subject to a $50,000 fine and be sentenced to 90 days in jail. Further, two or more offenses would render that employer ineligible for any tax rebate, credit or incentive programs.

As expected, lobbyists for trade groups like NFIB and the Louisiana Retailers’ Association came out in opposition to the bill. LABI’s Jim Patterson testified in committee that their group didn’t oppose the concept of stricter penalties, but they had a serious problem with the massive increase in fines.

(Now remember, LABI was founded in order to bust the construction-related labor unions through passage of Louisiana’s “Right-to-Work” law. And back when labor unions had clout, the term used then for the equivalent of today’s “contract workers” was “scabs”. You are invited to evaluate LABI’s 2016 statement to the committee with that in mind.)

Smith’s HB 665 narrowly passed out of the House Labor Committee, 7-6, but was defeated 33-59 on the House floor.

The performance audit states unequivocally that “the current enforcement process is not effective at deterring employers from misclassifying their workers,” and strongly suggests that LWC should continue to work with legislators to rectify that. It notes, “If LWC had the legal authority to impose liability on contractors for their labor brokers that misclassify workers, it could better ensure accountability for worker misclassification, ensure the state receives all related unemployment and income tax payments, and ensure that workers’ compensation coverage is provided for all employees.”

One reporter (not me, but Lanny Keller with The Advocate) asked Purpera if there’s any data available showing whether contractors working on the mega-industrial projects getting all the big economic development-linked tax breaks are more likely to use the labor broker loophole. Kellar mentioned Eddie Rispone, gubernatorial candidate and chairman of ISC Constructors, as a specific example.

Purpera deflected that, instead returning to comment about the post-Katrina proliferation of contract labor and labor brokers.

It’s a valid question, especially as regards a candidate for governor – one who is able to self-fund his $10-million campaign.

A friend of the Bayou Brief, curious to learn more about the Louisiana Workforce Commission’s limited enforcement process with employers, filed a public records request for “all warning letters to employers regarding misclassification of workers, from Jan. 1, 2018, to the present.” He received the following response

For reasons expressed below, the Louisiana Workforce Commission (LWC) is unable to comply with your request.

LWC utilized data in connection with the employers named and contacted via warning letters transmitted by LWC. The data utilized was obtained in connection with information received by LWC in its administration of the state’s unemployment compensation system. Relative to that, and pursuant to La. R.S. 23:1660.D, all UC (unemployment compensation) information and records obtained pursuant to the administration of the state’s UC system are confidential. Violation of sec. 1660.D subjects the violator to criminal penalties. This confidentiality would include records relating to the number of employees reported by an employer to LWC and the associated unemployment taxes submitted by an employer for each employee reported, as well as the number of (and details of) individuals from any particular employer who have applied for unemployment benefits.

Also, Section 4.1.B(12) of the Public Records Law explicitly recognizes that La. R.S. 23:1660 is “continued in effect” as an exception to the Public Records Law.

In other words, the info is classified – as none of our business.