Dealing with cracks in masonry is no problem for Doug Burton of Whitman Masonry Co. in Raleigh, North Carolina. It’s the cracks beneath the surface that are causing him headaches. Such cracks in the once direct, simple relationship between employee and employer now often result from the misclassification of employees as independent contractors, which can lead to minimum wage and overtime violations cheating workers, and often result in an unbalanced playing field for employers. When employers misclassify employees, they typically don’t pay overtime, Unemployment Insurance, worker’s compensation, or a variety of other taxes for these workers.
Burton, who has 35 years of experience in the construction business – 25 of which have been in an ownership position – contends that misclassification is not being done out of ignorance of the law; rather, contractors see their peers doing it and prospering without consequences so they follow suit.
“It’s a big problem in the construction market. A majority of people who are declaring their employees as independent contractors are doing it to avoid paying payroll taxes and other benefits,” he says.
To address this widespread problem, the Department of Labor has partnered with the IRS and 35 states to enhance information sharing and coordinate enforcement. North Carolina is among the latest to sign a memorandum of understanding and Burton is hoping it’s the first step toward holding contractors in his state accountable.
“Ideally, you would like to see the industry police itself, but that is not being done,” he says. “If the federal government discovers you’re not paying unemployment taxes, there has to be a way they can inform the state and vice versa. The MOU provides a mechanism to allow the sharing of such information.”
Burton explains that he has lost bids on construction contracts against competitors who treat all of their workers as subcontractors, misclassifying them as independent contractors and paying them under the table. A single employee may cost Burton 20 percent more than what that same worker would cost these competitors. However, he knows that playing by the rules benefits his bottom line in other ways. It cultivates loyalty that results in efficiencies, Burton says, noting that nearly 40 percent of his current employees have been with his company for at least 10 years.
Two years ago, an investigation by the Charlotte News & Observer claimed that $467 million in state and federal taxes were being lost in North Carolina each year due to misclassification fraud in the construction industry alone. “Those misclassifying workers are not paying worker’s compensation premiums and no federal or state withholding taxes. It makes for an unfair playing field and it has to stop,” says Burton.
For a fact sheet on myths about misclassification, go here.
Editor’s note: The “DOL Working for You” series highlights the Labor Department’s programs in action. View other blog posts in the series here.
Mark Huffman is a public affairs specialist in for the department in the District of Columbia.