Employee or Independent Contractor?

State task force sets sights on multimillion-dollar problem of employee misclassification

From The Nevada Independent, Sean Golonka a new employee misclassification task force in Nevada focusing on misclassification in the construction industry. Sean writes: 

This year, members of Nevada’s new employee misclassification task force began meeting to address a problem that costs the state — and Nevada workers — millions of dollars each year. They have met four times this year, including a week ago.

A January report from the Institute for Construction Economic Research estimates that more than 12,000 construction workers in the state, representing about 11.4 percent of industry employees, were misclassified or working off the books in 2018.

“The estimates likely underrepresent the actual number of misclassified workers … This number is lower than many other estimates,” Swen Prior, a Las Vegas-based employment and labor lawyer with experience in misclassification cases, wrote in an email. “The number of misclassified workers in Nevada is still too high and may lead to significant problems and costs for employers that continue to misclassify their workers.”

The study projects that rampant misclassification and off-the-books employment in the construction industry cost the state nearly $50 million in revenue in 2018, including $31.1 million less for the workers compensation fund and $11.8 million less for the unemployment insurance fund.

The study estimates a similar financial impact on the workers, including $34.2 million in federal contributions for Social Security and Medicaid offloaded from employers onto workers.

Prior noted that some of this misclassification can come as a result of simple error, as some employers believe they have the option to hire workers as independent contractors rather than employees. But he explained that others do use the practice to “reduce labor costs and avoid paying state and federal taxes.”

The path to a task force

When the creation of a misclassification task force came up for discussion in the Legislature in 2011 and 2019, labor groups pointed to the significant financial losses that misclassification can cause — Ali Anderson, state legislative director for the International Brotherhood of Teamsters, said that bad-acting employers are able to save up to 30 percent on operating expenses by misclassifying employees.

The Teamsters and other labor unions, such as the Carpenters/Contractors Cooperation Committee, argued that employee misclassification in Nevada had largely been perpetuated by employers in the construction industry.

Meanwhile, resistance to two bills proposed in 2011 and 2019 came as opponents took issue with the new way independent contractors would be classified under the legislation, even as they agreed with supporters that it was a good idea to root out bad actors that intentionally misclassified employees.

Both bills sought to establish use of the “ABC test” for identifying independent contractors, but critics argued that the test would make it too difficult to classify workers as independent contractors because the test considers a worker an employee by default, unless all three test conditions are met.

A worker is defined as an independent contractor under the ABC test if: (a) an individual is free from control or direction over performance of the work, (b) the service provided is outside the usual course of the business for which it is performed; and (c) an individual is customarily engaged in an independently established trade, occupation or business.

Bill opponents were eventually appeased through revisions of the 2019 bill, SB493, which clarified that the “ABC test” would only apply to the set of contractors working solely within the construction industry.

The 2019 legislation also created the task force and required certain state agencies, including the office of the Labor Commissioner, the Department of Employment, Training and Rehabilitation (DETR) and the attorney general’s office, to share information about suspected employee misclassification.

“I think this issue needs to keep up and continue to be looked at … workers need to be protected,” said Teresa McKee, who is chair of the task force and also serves as CEO of the Nevada Association of REALTORS. “The law may need to be adjusted from time to time to make sure we capture what’s going on in the marketplace.”

The group began meeting early this year after members were appointed in October. It will be working to create a report by July 1 with recommendations to the Legislature, as required by the bill that established the task force.

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