Two bills recently introduced in Congress take on the issue of employee misclassification which puts companies that properly classify their workers at a competitive disadvantage and costs the government and taxpayers billions in unpaid taxes. Both bills deserve the full support of our elected officials and neither is getting enough attention publicly from the media or anyone else.
The most recent and most directly applicable for businesses that are currently hurt by competitors not playing by the rules is the Fair Playing Field Act of 2010 (H.R. 6128) which was introduced in September by Sen. John Kerry, D-Massachusetts, and Rep. Jim McDermott, D-Washington. The bill would close a tax loophole or "safe harbor" provision in the tax laws since 1978 that allows businesses to misclassify workers as independent contractors. Most notably, FedEx used the loophole to escape a $319 million back tax assessment by the IRS after misclassifying its Ground Division drivers as independent contractors.
Anyone using independent contractors would have to provide the workers with a written statement on their federal tax obligations, the labor and employment law protections that do not apply to them and their right to seek a determination from the IRS on their status. The bill also would provide the Treasury Department with additional tools to stop businesses from gaming the system and hurting honest companies.
The other bill, the Employee Misclassification Prevention Act (EMPA or H.R. 5107), would help prevent employee misclassification by requiring employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification. Businesses would pay a $1,100 fine per person for each incident. Penalties would increase to $5,000 per person for ongoing violations.
Misclassification hurts companies that bid on jobs honestly while decreasing the payroll costs by as much as 30 percent for companies that cheat the system. These dishonest companies also avoid millions on their unemployment insurance taxes, workers compensation premiums, social security contributions and administrative payroll costs. At the same time, law abiding companies are not only at a huge disadvantage in having to compete with cheaters who cut corners, but they are forced to pay higher workers compensation premiums as costs escalate to make up for the overall shortfall.
How prevalent is the problem? A Department of Labor (DOL) study in 2000 found 10 percent to 30 percent of firms audited in nine states misclassified at least some employees. More recently, the federal Government Accountability Office (GOA) estimated that employee misclassification cost the United States government $2.72 billion in revenue from Social Security, unemployment and income taxes in 2006 alone. The Internal Revenue Service (IRS) credits misclassification with 82 percent of all uncollected taxes. At a time when shrinking budgets continue to challenge government agencies across the country, isn't it time to collect taxes from those that are illegally avoiding them?
The problem is even more severe in the language services industry which provides interpretation services to federal and state governments and the private sector, including the healthcare industry, to accommodate the nation's growing limited English proficient (LEP) population. Most customers of language interpretation require interpreters who have been professionally trained and who can be scheduled, supervised and monitored to ensure quality. This level of control can only be assured with actual employees. Still, nearly all of the interpretation companies in the industry base their business model on the use of interpreters who they misclassify as contractors, even though exercising this control clearly places interpreters into the role of employee and the company as employer.
In addition to creating an uneven playing field, retaining independent contractors also can hinder the quality and performance of interpretation services. That's particularly true in the healthcare industry and emergency services which includes the nation's 9-1-1 system. Interpretation services providers can't guarantee the security and confidentiality of their clients' private information if independent contractors - who legally cannot be subject to the company's control - are used.
We challenge everyone in Congress to speak up if you hear from businesses or workers in your congressional districts also disadvantaged by employee misclassification. We also welcome and appreciate any suggestions as we work to address the problem of employee misclassification. And, most immediately, please co-sponsor and help ensure passage of H.R. 6128 and H.R. 5107.
Louis Provenzano is President and Chief Operating Officer of Language Line Services, the world's leading provider of language-based services.