Good and honest businesses need many things from state government in order to thrive: good roads, water and sewer service, police and fire protection, an efficient courts system, a fair tax code and good schools to educate workers – just to name a few.
Few things, however, are more important in this realm than the guarantee of a fair and level playing field. Unless businesses can operate with the assurance that everyone is playing by the same rules, the very ideas of competition and a free market are rendered meaningless. Brute force and corruption quickly take the place of quality and efficiency when it comes to determining which companies succeed and which ones fail.
Sadly, North Carolina now finds itself in just such a destructive, dog-eat-dog situation. Not only are our weak laws penalizing honest, home grown businesses in favor of dishonest ones, we’re actually making it easy for corrupt out-of-state companies to move in and muscle out those that play fairly.
The issue is “misclassification” — the wrongful treatment of employees by their employers as “independent contractors.” Unlike honest employers, cheating companies undercut their competitors by not paying workers’ compensation premiums on their employees, by not deducting Social Security and unemployment insurance payments, and by avoiding wage and hour laws. In North Carolina our inadequate laws actually invite this kind of behavior.
It doesn’t, however, have to be this way.
As an adjunct law professor, I have had the opportunity to study the responses of states around the country to misclassification and learned that many have cracked down successfully.
In 2015 in Utah and Arizona, 16 employers misclassified over 1,000 construction workers. These businesses were caught and forced to pay $700,000 in back wages and penalties.
In New York, the United States Department of Labor obtained a consent judgment from four plumbing and heating contractors in the amount of $1.42 million in back wages and other damages involving 300 employees.
In the state of Washington, a former dry wall contractor was fined in excess of $1 million for failing to pay workers’ compensation premiums for his employees.
Alas, my research has revealed no such cases in North Carolina. Does that mean misclassification does not exist in this state? On the contrary, it means no one is going after the cheaters.
Last year, Raleigh’s News & Observer completed an exhaustive investigation and estimated that because of misclassification, approximately $467 million in state and federal taxes were being lost each year in North Carolina, and that thousands of workers were not covered by workers’ compensation insurance.
To their credit, lawmakers responded by introducing several bills with the stated goal of stopping the cheating. Unfortunately, the bills now moving in the General Assembly will allow repeat cheaters to get away with little more than a slap on the wrist if they are enacted into law.
The bills, for instance, do not provide for “stop work” orders that would force companies to halt work on projects until they obtain insurance for their workers.
What’s more, cheating employers are not punished at all until they are caught the second time. And even then, the penalty is a paltry $1,000 fine per employee regardless of how big the business is, how long the cheating has gone on and how much harm may have been caused or the competitive advantage gained over honest employers.
Last and perhaps even more importantly, there is no criminal penalty attached to misclassification fraud. These companies are not confused about the status of their employees. The cheating is blatant and intentional. It’s simply outrageous that an out-of-state company can come in and cheat honest businesses and North Carolina taxpayers out of millions of dollars and no one is even threatened with jail.
The bottom line: In an area that desperately needs tough laws and strong enforcement, the General Assembly is doing little more than paying lip service to a terrible problem.
As a result, scores of seriously injured workers and their families will continue to be left penniless and dependent on taxpayer-funded safety net programs and countless honest employers will continue lose out on contracts they should have won, be forced to lay off workers they should have kept and perhaps even go out of business.
As citizens, we should be outraged that corrupt businesses in this state are allowed to cheat with no serious consequences. The General Assembly has the ability to stop these cheaters and protect honest businesses and honest taxpayers. Will they do it?
Leonard T. Jernigan, Jr, is the author of N.C. Workers’ Compensation – Law and Practice, and teaches workers’ compensation law at N.C. Central University School of Law.