Sen. Waterman: The Issue of Worker Misclassification

INDIANAPOLIS, April 24 -- The Indiana State Senate Republican Caucus issued the following news release on the behalf of Indiana State Sen. Waterman:

There's an illegal business practice that's driving down worker salaries in Indiana and keeping employees from earning deserved benefits.

And the state needs the public's help to track down violators.

This practice is called "worker misclassification," and it occurs when a worker who meets the statutory or common law definition of an employee is wrongly labeled by the employer as a self-employed worker or independent contractor.

Imagine this hypothetical situation. If Company A hires you as an employee, they must adhere to state and federal employment laws. Company A would have to verify your employment, withhold federal and state taxes, withhold Social Security and Medicaid, and pay for unemployment and workers compensation insurance. Additionally, you, as an employee, are protected by several federal workplace laws including the Occupational Safety and Health Act (OSHA) and cannot be discriminated against.

On the other hand, if Company A hires you as an independent contractor, they wouldn't have to follow any of those employment laws. You, as a contractor, would only be obligated to fill out a 1099 tax form.

It's not just the misclassified workers that are hurt by this practice. Workers at competing firms and public services are also negatively affected by worker misclassification.

Employers are harmed when their competitors misclassify employees and therefore have lower labor costs. This has a negative effect on employees' wages as other companies have to keep their costs artificially low to compete with businesses that misclassify their workers.

Governments are impacted when employers fail to withhold taxes on an employee, because there are challenges of recovering taxes due directly from an individual. Some individuals who don't have access to worker's comp insurance become dependent on social services because of their injuries and inability to work.

The issue of worker misclassification has been a growing concern for several years. In 2011, CBS News found the U.S. Department of Labor recovered $5 million in back wages for nearly 8,000 workers. That is a 500-percent increase from what was collected in 2008.

Indiana didn't begin noticing worker misclassifications in a big way until around 2009. That's why in 2010, the state legislature's Pension Management Oversight Commission began studying the effects of worker misclassification in Indiana.

Over the year-long study, many experts testified about the costs of these misclassifications. One testifier, Michael Kelsay - an economics professor at the University of Missouri-Kansas City - said Indiana is losing upwards of $200 million annually in income and payroll taxes.

Currently, 18 states have addressed this issue in some way. A few states have enacted legislation, which includes adding "worker" to the definition of an employee. Some are also fining companies for not reporting individuals and not paying the proper taxes under employment laws.

But laws can only be enforced if worker misclassification is reported and caught. The Indiana Department of Labor (IDOL) and U.S. Department of Labor are having difficulties enforcing compliance with employment laws.

In preparation to address worker misclassification legislatively, the IDOL created a website in an effort to monitor this issue in Indiana.

If you have evidence of suspected worker misclassification and would like to submit a tip to IDOL, please send your information to [email protected] or visit www.in.gov/dol/2868.htm. When sending a tip, please do not include Social Security numbers or confidential personal information.

Your tip will remain confidential and must provide the following basic information in order to initiate an investigation:

* Name of the employer

* Name of at least one worker who may be misclassified

* Location where the work is being performed

In preparation to address worker misclassification legislatively, I worked with the IDOL to create this website to monitor and gauge the scope of this issue. Our goal is to ensure that Hoosier workers are treated fairly. This tip line will help us track down those companies who are neglecting employment laws by misclassifying their workers.

I encourage you to make sure you read and understand all the paperwork an employer provides you. If you ever come across worker misclassification, submit a tip to the IDOL so they can began an investigation.

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