Decades since it was first recognized, the deliberate misclassification of workers by contractors remains a big problem. Federal legislation, reintroduced last year, is likely to go nowhere, so it's worth asking what, if anything, has worked at the state level. As it turns out, there are some promising examples, even if none of them can serve as a perfect template for national law.
Briefly, an employer who intentionally misclassifies a worker as an independent contractor is able to avoid paying state and federal taxes and workers'-compensation premiums. It is possible to accidentally misclassify a worker out of confusion, but intentional misclassification remains a flourishing category of fraud, and honest contractors lose work because of it every day. State-level reforms help and have added many millions of dollars to treasuries that otherwise would have been cheated out of the income.
Part of the problem is the complexity of defining who is an "employee." Maine has tried to eliminate confusion within its borders by enacting, in December 2012, a common standard for defining "independent contractors." Before then, employers could classify a worker as an independent contractor for unemployment but not for workers' compensation and vice versa. As many as 10 different definitions had currency in the state.
Now, employers have to use the same definitions for "independent contractor" and "employee," whether or not the state is auditing for unemployment tax, staff wages and hours, and workers' compensation.
Presumption of Employment
According to Paul Sighinolfi, executive director of the Maine Workers' Compensation Board, the 2012 change also created a presumption in the law, which didn't exist before, that any individual who performs services for remuneration must be classified as an employee.
But does Texas have anything to learn from Maine? Texas has a booming economy, and part of the boom's dark side has been the exploitation of misclassified workers. This year, a new law kicked in: If a company is awarded a contract for public works, that company must properly classify as either an employee or an independent contractor any individual performing services under its contract. The state can fine employers $200 for each misclassified worker.
Regarding the influx of illegal immigrants at our southern border, others believe that no meaningful enforcement of the labor laws can be effective without comprehensive immigration reform. The U.S. Dept. of Labor has begun to prosecute more vigorously cheating employers. Any federal legislation is apt to face stiff opposition if it proves to be too burdensome to employers.
Meanwhile, the crazy quilt of state policies leaves the door open to fraud.