This simple trick costs billions

“Employee misclassification.” The term is not likely to get your heart racing, but it should. Why? Because it’s illegal, it’s widespread and it’s costing North Carolina’s taxpayers close to a half-billion dollars per year.

Perhaps worst of all? Everyone involved – from President Obama to Gov. Pat McCrory, from federal and state regulators to construction company executives to day laborers – knows it’s going on yet gives it a wink.

A year-long investigation by the (Raleigh) News & Observer, the Charlotte Observer and other McClatchy newspapers reveals for the first time how the simplest sleight-of-hand by employers is defrauding the government of billions of dollars nationwide. As importantly, this trick is cheating law-abiding companies of work and depriving workers of basic protections.

Here’s how it works: Companies in the construction industry frequently label their workers as independent contractors rather than employees. They do this despite rules that require those workers to be considered employees. In doing so, they save billions in payroll taxes, unemployment taxes, overtime pay and workers’ compensation claims – putting a burden on all other taxpayers.

By lowering their costs, they can submit bids for work that undercut those of law-abiding companies, whose costs can be higher by 20 percent or more. They also cheat their workers of basic employee benefits such as workers’ comp and unemployment payments if they are laid off.

Reporters estimate that more than 100,000 N.C. construction workers are misclassified, more than a third of the total. The employers and employees are saving $467 million through the scheme. Employers in other industries use the same tactic.

The violations are flagrant and the indifference about it bipartisan. President Obama’s chief monitor of stimulus money, Earl Devaney, admits that he and others at the top levels of Obama’s administration did nothing for years to stop the practice. The Department of Housing and Urban Development, the IRS, the Department of Labor and Congress have all been similarly passive.

And in North Carolina, Gov. Pat McCrory has known of the problem since at least 2012, when he responded to a News & Observer series about it and vowed change. Yet he has done nothing about it and over nearly seven weeks never responded to reporters’ requests for comment for the current series. Labor Commissioner Cherie Berry would not talk with reporters either. The legislature has failed to put a stop to it either when Democrats or Republicans were in charge.

Meanwhile, known violators continue to receive multi-million dollar contracts from the federal government. Southern Mechanical, for instance, was working on 20 government housing projects last year even as it was openly treating hourly workers as independent contractors.

The practice is not complicated, and neither is the solution: Regulators need to do their jobs and be on the lookout for violators. Congress and the legislature could also stiffen the laws. In New York, for instance, workers in some industries are presumed to be employees, and the burden is on the employer to prove they are independent contractors.

The tax-dodging has been going on openly for years. It’s time to put a stop to it.