The hunt for cheap labor has led to a rash of payroll fraud by companies scraping for any advantage in a sputtering economy, lawmakers say.
As a result, they say, American taxpayers are cheated out of millions, workers are underpaid and the injured are denied workers compensation. Lawmakers on Capitol Hill introduced legislation Tuesday, in conjunction with a Senate hearing, in an effort to curtail what they say has become a widespread practice that hurts not only workers but also law-abiding companies that can’t compete with the bad actors.
The issue is common in fields such as those for janitors, homecare workers and cable installers. But it’s especially prevalent in the construction industry, where a company can save as much as 30 percent of its costs by wrongfully reporting its workers as independent contractors instead of employees.
The practice is known as misclassification. In the most basic terms, if the employer is directing the worker, including setting his or her schedule, telling the worker what to do, when to do it and how to do it, the worker should be listed as an employee, according to federal rules.
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By listing workers as independent contractors, companies can avoid paying insurance, taxes and overtime. It also shields companies from responsibilities of having to protect those working for them.
Matt Anderson of Ira Township, Mich., needs only to look at his left hand to see the potential repercussions.
The former carpenter’s life changed two years ago when his left hand slipped into a table saw that cut off one finger and injured three others. He’s had eight surgeries to repair his hand and needs more.
“The damage was so bad they had to take bones from my wrist and hip,” Anderson testified Tuesday before a Senate labor subcommittee. “And the doctors also needed to take bones from a cadaver to do the reconstruction.”
Because he was an independent contractor, Anderson was unable to collect workers compensation. He had become an independent contractor, he said, because his employer, Dave & Marty Inc. of Michigan, had said it was the only way he’d be able to continue working with the company.
Anderson said he had no choice. He had a family to support.
Reached after the hearing, company president David Marrocco said Anderson was not telling the truth about why he became an independent contractor. Marrocco said that he was “flabbergasted” after watching video of the testimony and that Anderson was not forced out and could have remained an employee.
“He wanted to make more money,” Marrocco said. “He wanted to go out on his own.”
Sen. Bob Casey, D-Pa., estimates the payroll theft has cost taxpayers tens of billions of dollars. He introduced legislation Tuesday that would make misclassification a violation of the Fair Labor Standards Act, would assign penalties for each case of payroll fraud and would create rights for employees to know what their status is and require employers tell workers their status.
“I think a lot of people would be stunned to learn that under current federal law it is not a violation of the Fair Labor Standards Act to engage in this kind of misclassification, this kind of fraud,” Casey said in an interview after the hearing. “It should be illegal and it’s unfortunately not unless you violate some other law.”
But some businesses that depend on independent contractors worry the legislation would only create additional, onerous mandates on businesses in an already tough economic environment.
Chris MacKrell, president of Custom Courier Solutions of Rochester, N.Y., testified that his business couldn’t continue to operate without the assistance of independent contractors who deliver packages for the company. He said those workers crave independent schedules and would likely leave if forced to become employees.
“Congress must not hinder the entrepreneurial spirit and recognize the great potential an (independent contractor) can provide,” he said.
MacKrell said his company employs about 156 people and uses about 225 independent contractors to make deliveries.
Sen. Johnny Isakson, R-Ga., warned that Congress must be careful to distinguish between those bad actors and the good guys using independent contractors properly. He said there are “unintentional consequences of depriving a lot of people of work that is legitimate.”