Guest Post: Gregory J. Hubachek on Solving Louisiana’s Revenue Crisis by Targeting Misclassification

Gregory Hubachek, of Workers’ Compensation LLC, a law firm representing injured workers, has practiced in the field of workers’ compensation for over two decades. Since 2009, Hubachek has served on the governor’s Workers’ Compensation Advisory Council (WCAC) as an “at-large” appointment. In his role on the WCAC, Hubachek has sought to preserve fairness in the Louisiana Workers’ Compensation Act. As a result of his experience in the field of workers’ compensation, Hubachek has been enlisted to provide educational presentations for various organizations, for example, the Office of Workers’ Compensation Administration,  the Louisiana Association of Business & Industry and the Workers’ Injury Law & Advocacy Group. Hubachek is a graduate of the University of California, Berkeley and the University of California, Hastings College of Law.

Below, Hubachek and D. Kirkhoff Brainard sound off on how Louisiana can remedy its current budget woes by enforcing existing employment laws, and why dedicating resources to the Louisiana Workforce Commission to that end is so vitally important.

 

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As tax day draws near, many Louisiana voters may be thinking of the state’s record budget deficit and wondering how much more money they’ll have to give to the government this year.

Governor John Bel Edwards made national headlines earlier this month in a rare Sunday night television address, warning voters that draconian cuts in state services are imminent unless the Legislature approves a package of tax increases.

Louisiana faces an immediate shortfall estimated at $940 million, with a projected deficit of $2 billion for the 2016-2017 fiscal year. Without immediate and significant tax increases, Edwards said the state will be forced to shut down hospitals, eliminate some public health programs, and cancel college courses, including on the LSU main campus in Baton Rouge. There is, however, one solution that would go a long way towards balancing the state’s budget without the need for major tax increases.

Enforce existing laws against corporate tax cheats

Worker misclassification is a longstanding – and growing – problem that has received little public attention until recently. Misclassification occurs when companies employ independent contractors, temp agency employees, or undocumented workers for positions that should be filled by direct employees.

Although some misclassification is unintentional, many companies intentionally misclassify employees in order to save money. This practice is especially prevalent in employment sectors where workplace injuries are more common, such as the construction, transportation, and hospitality industries. It is also disturbingly widespread. A U.S. Department of Labor study found that between 10 percent and 30 percent of audited employers misclassified workers and estimated that “misclassifying just one percent of workers as independent contractors would cost unemployment insurance (UI) trust funds $198 million annually,” according to Sarah Leberstein of the National Employment Law Project. 1

Business owners who misclassify workers:

  • Avoid paying their share of unemployment and Medicare taxes for these employees.
  • Avoid paying workers’ compensation insurance.
  • Gain an advantage on competitors who play by the rules.

How unethical companies profit at taxpayers’ expense

How does this relate to Louisiana’s revenue crisis? The money saved by businesses who misclassify their workers comes directly out of taxpayers’ pockets. Here are just a few examples of how unethical businesses make money at taxpayer expense:

  • The cost of caring for injured workers. Companies who misclassify employees do not have to provide health insurance for these workers. As a result, misclassified workers who are injured on the job often end up receiving state disability insurance and/or Medicare. The Occupational and Safety Health Administration estimates U.S. taxpayers “subsidized workplace injuries with $33 billion in benefits in 2001 alone.” 2
  • Unpaid state taxes. In the construction industry alone, estimates of annual tax revenue lost due to worker misclassification are staggering: $400 million in Florida, $467 million in North Carolina, and $1.2 billion in Texas. 3
  • Unreported taxable wages. Companies who misclassify workers often underreport wages paid. The Louisiana Workforce Commission discovered more than $50 million in unreported taxable wages in 2015. 4

Companies who misclassify employees as independent contractors also cost the state in the form of lost taxes from these workers. Long­-term studies have shown that “self-employed” workers tend to underreport their annual taxable income by an average of 30 percent. 5

While we don’t know the true costs of worker misclassification to Louisiana taxpayers, it certainly numbers in the hundreds of millions of dollars per year. The Workforce Commission set a new record in cracking down on worker misclassification in 2015, discovering 19,956 misclassified workers statewide.

Due to limited enforcement resources, however, the agency’s enforcement effort pales in comparison to the estimated scope and cost to taxpayers of this form of corporate tax fraud. Numerous studies have shown that worker misclassification is rampant in industries that comprise a significant portion of Louisiana’s economy, such as construction 6, food and beverage services, and transportation. To maximize resources, the commission primarily audits “risk-based” companies, acting on “tips, complaints and information from partner agencies and the public.” 7

Conclusion

Companies who knowingly misclassify employees as independent contractors are cheating Louisiana taxpayers out of hundreds of millions of dollars each year. At a time when departmental budgets are being cut across the state, we imagine the political capital to devote more resources to identifying misclassified workers will be hard-­won.

However, Governor Edwards has already shown he is willing to tackle Louisiana’s toughest problems head on. Increasing the scope of Louisiana’s crackdown on corporate scofflaws and raising the penalties for businesses that repeatedly and intentionally break the law while putting workers and their families at risk is a win-­win solution that can be embraced by voters on both the left and the right.

We have every confidence the Edwards administration will develop an appropriate response to a crisis that affects not just the injured workers who are denied adequate health care, but every honest Louisiana taxpayer.

Notes

1 “Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries,” National Employment Law Project, Sarah Leberstein, updated August 2012.

2 “Adding Inequality to Injury: The Costs of Failing to Protect Workers on the Job,” U.S. Department of Labor, Occupational Safety & Health Administration, March 4, 2015.

3 The McClatchy news chain spent a year investigating worker misclassification in the construction industry. McClatchy estimated that more than a third of construction workers in Southern states such as North Carolina and Texas were wrongly classified as independent contractors, resulting in lost tax revenue of up to $1.2 billion annually in Texas alone. McClatchy estimates annual lost revenues at $467 million in North Carolina and $400 million in Florida. (Franco Ordoñez and Mandy Locke, “IRS’ ‘safe harbor’ loophole frustrates those fighting labor tax cheats,“ McClatchy DC, December 14, 2014.)

4 Louisiana Workforce Commission, “LWC sets another record in identifying misclassified workers,” February 4, 2016.

5 Francoise Carré, “(In)dependent Worker Misclassification,” Economic Policy Institute, June 8, 2015.

6 Construction accounted for a 5.8 percent share of the Louisiana GDP in 2014, the second highest rate among all states, according to Associated Builders and Contractors, a construction industry trade association. “Louisiana ranked No. 2 nationally for construction sector contributions to GDP last year.” Greater Baton Rouge Business Report, August 11, 2015.

7 Louisiana Workforce Commission, February 4, 2016.

 

Image Credit: BournCreative

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