What happens to honest businesses when unscrupulous competitive businesses fail to carry workers' compensation insurance for their employees? In the difficult economy, some of the honest players have suffered losses while scofflaws thrive. North Carolina's NewsObserver features an investigative series on Ghost Workers, which takes an in-depth look at the many ramifications of workers' comp avoidance schemes and the ways that this type of fraud hurts other businesses, the state's coffers, and any workers who are injured on the job.
State legislators and candidates in the upcoming state elections are competing to raise the outrage meter in the wake of the NewsObserver's revelations that as many as 30,000 employers are failing to carry workers' compensation insurance. Many of these employers are misclassifying workers as independent contractors, so they are also thumbing their noses at other statutory obligations such as taxes, Social Security, unemployment tax, and overtime pay.
Unsurprisingly to those who have followed the misclassification trail in other states, the construction industry offers a fertile climate for fraud to thrive. The NewsObserver explains how a unique bureaucratic loophole in the state can be worked to game the system:
"A business owner, often in the construction industry, tells his insurance agent that he has no employees. He excludes himself from the policy, which is his right as a sole proprietor. He buys a policy to cover a "ghost," an unknown employee who might unexpectedly join him to work during the year.
These policies can make a business look like it has more insurance coverage for its workers than it has."
Tax dodging employers can hide under layers of subcontractors, as well as by hiring illegal immigrants. And state agencies that operate in silos are not coordinating to thwart this practice.
Not all the employers are small operations - the expose talks about a firm named Martin's Bricklaying, which supplied 76,000 hours of labor to help build the $125 million Wake County Detention Center, earning $1,066,538 for this work.
"The company's owner, Sabas Martin Galeana, has run afoul of state and federal tax obligations in years past, court records show; he settled the last of three liens in 2009. A review of several employees' recent pay stubs shows that Martin has failed to withhold state and federal taxes as recently as July. The workers say he didn't provide his workers the tax forms they needed to settle their own obligations."
The practice of employee misclassification isn't unique and it's hardly surprising. But what is surprising is that North Carolina is so slow off the mark when other states and the federal government have been taking aggressive steps to curb misclassification and to penalize scofflaws. We've been covering stories of states getting tough on misclassification and workers comp avoidance since 2004. We wonder how the heads of various agencies in North Carolina never noticed. The state has faced serious budget cuts to valued services in recent years, all the while bleeding much needed tax revenue to lawbreakers. Kudos to the NewsObserver for their series.
North Carolina legislators will be working to plug this hole - particularly since it's an election year. They may also want to sign on to federal efforts such as the
Deparment of Labor's Misclassification Initiative. Thirteen states have signed Memorandum of Understanding (MOUs) with the Department of Labor's Wage and Hour Division, and in some cases, with its Employee Benefits Security Administration (EBSA), Occupational Safety and Health Administration (OSHA), Office of Federal Contract Compliance Programs (OFCCP), and the Office of the Solicitor. The DOL says that these MOUs, "will enable the Department to share information and to coordinate enforcement efforts with participating states in order to level the playing field for law-abiding employers and to ensure that employees receive the protections to which they are entitled under federal and state law. Employers that misclassify their employees may not be paying the proper overtime compensation, FICA and Unemployment Insurances taxes, or workers' compensation premiums."
Source: http://www.workerscompinsider.com/2012/08/north-carolinas.html
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