New rules won’t stop worker misclassification cheats

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 – to 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.

Last year, Raleigh’s News & Observer and the Charlotte 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 will allow repeat cheaters to get away with little more than a slap on the wrist.

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.

Last and perhaps even more importantly, there is no criminal penalty attached to misclassification fraud. It’s simply outrageous that an out-of-state company can come in and cheat honest businesses and North Carolina taxpayers and no one is even threatened with jail.

The bottom line: the General Assembly is doing little more than paying lip service to a terrible problem.

Leonard T. Jernigan, Jr., teaches workers’ compensation law at N.C. Central University School of Law.