Senate Bill 89, as proposed, gives cover to offenders who purposefully use subcontractors or independent contractors to avoid paying state and federal employment taxes, unemployment insurance and workers' compensation. SB 89 does not combat illegal misclassification, but rather, legitimizes it.
Employee misclassification has become one of the fundamental pillars of the "race to the bottom" business model that is so prevalent in the U.S. construction industry today.
This business model is negatively affecting thousands of construction workers across the state and, aside from the damage it inflicts upon those workers, it's costing Kentucky millions of dollars every year in unemployment insurance taxes, loss of income tax revenue and unpaid worker's compensation premiums.
Misclassification not only negatively impacts Kentucky's construction workers; it also negatively impacts honest contractors and every Kentucky employer and taxpayer in a number of ways. This happens in two ways.
First, the conditions for a fair and competitive marketplace are sabotaged. Dishonest contractors who misclassify their workers have a pricing edge over their counterparts, resulting in an unlevel playing field that places contractors who play by the rules at a competitive disadvantage.
Second, misclassifying workers negatively impacts every Kentucky employer, and deprives local, state and federal governments of legitimate revenues, placing greater stress on honest employers and taxpayers.
The legislation divests the Education and Workforce Development Cabinet's Division of Unemployment Insurance of its jurisdiction over employers who fail to contribute to the already-stressed unemployment insurance fund. In 2011, 1,774 unemployment insurance audits were conducted by the Division of Unemployment Insurance, and 2,800 workers were determined to have been misclassified as independent contractors. That accounted for $25,003,427 in unreported wages, $16,126,198 in unreported taxable wages, and $309,983 in unemployment insurance contributions collected.
The Division of Unemployment Insurance would have to refer these cases to the Department of Revenue if SB 89 is adopted.
It also prevents the Kentucky Labor Cabinet's Department of Workers' Claims from pursuing "up the line" liability for an employer's failure to obtain worker's compensation insurance.
Interestingly, while divesting the interested agencies of jurisdiction, the drafters of the bill decided to make reports of violations and sharing of information among state agencies discretionary.
The bill imposes duties on the Department of Revenue that the department is not qualified to execute. Revenue's employees are not trained to make the determination as to whether a person is an employee or independent contractor. This is an area of law that the Labor Cabinet and others are better suited to administer.
The bill also places duties on the Department of Revenue without providing additional staff to execute these duties. Representatives from each of these agencies have expressed concerns regarding the proposed changes.
SB 89 creates six categories under which a worker can lawfully be considered an "independent contractor," which completely changes the common-law factors now used by the Division of Unemployment Insurance and Department of Workers' Claims, and the statutory definition of employee found in Kentucky's wage and hour law.
This substantial change would create litigable issues for employers, employees, contractors and the agencies involved for years to come.
This bill also would reduce the protections that complaining parties enjoy under existing statutes. Currently, the identity of a claimant is protected from disclosure under the Open Records Act. This bill will expose the identity of the claimant, which would discourage an individual who has been misclassified and denied protection of the applicable statutes from filing a complaint.
Many supporters of SB 89 have opposed meaningful legislation in previous legislative sessions to combat this business model.
An employee who is misclassified is left unshielded by various laws designed to protect workers but guaranteed only to employees, including minimum hourly wage requirements, overtime pay, safety and health standards, medical leave, anti-discrimination protections, and access to unemployment insurance and workers' compensation.
SB 89 does not provide protection for those workers denied these protections; it provides cover for rogue contractors that gain unfair competitive advantage over the contractors that play by the rules.
SB 89 cleared the Senate but has not advanced in the House. It should be defeated.
March 1 editorial, "Level the field for small business; bill clarifies rules on contractors"