Brandi Gonzales, Assistant Vice President of Premium Audit and Billing Manager at LUBA Workers’ Comp, sat down with Louisiana Comp Blog to discuss misclassification and whether Louisiana is doing enough to combat the complex problem in our most prominent industries.
Comp Blog: Do you find that Louisiana’s industry-mix creates a situation where workers are more likely to be misclassified?
Gonzales: We write a lot of construction policies at LUBA, so I do find that sometimes there is some question about employee classification. We also write several small business accounts, so sometimes owners get confused. It’s rare that we get cases of true fraud – knowingly, willfully attempting to deceive. That’s why it really comes down to education. I find that a lot of our policyholders have questions about this, but I don’t get to them at audit until they’ve been with us for a year. The underwriters can ask the right questions, but a lot of people, particularly subcontractors, just aren’t aware of the law.
Comp Blog: The Louisiana Workforce Commission’s fraud section was restructured over the last several years to include the GAME ON Task Force and improve communication between departments. Have you seen a difference since GAME ON was implemented?
Gonzales: We haven’t referred anyone for fraud to GAME ON as of yet – either on the claimant side or the employer side. On the premium side though, we worked with [previous LWC Fraud Section head] Kaye Fournet in the past when we’ve come across fraudulent certificates of insurance. It’s much easier these days to verify the certificates because of NCCI’s online coverage verification system. Of course, we don’t immediately refer those as fraud, we do our own investigation first, but it’s a good way to initially confirm information. We also get some people that try to use opt-out agreements, which are permissible in other states like Texas, but not in Louisiana.
Comp Blog: There’s a lot of talk surrounding misclassification as an issue of fairness. Can you speak to why that is the case?
Gonzales: A fair playing field protects the small business owner. A lot of our bigger businesses don’t have these issues because they have to understand the law or risk serious penalties and exposures. It’s the small business owner that doesn’t understand that shirking his responsibility to get comp coverage results in an unfair advantage compared to his competition who is following the rules. Our insureds should not be penalized financially because of these folks that refuse to follow the rules.
Comp Blog: Currently, penalty amounts for employers that willfully misclassify are set at $1,000 per offense with each employee considered a separate offense. Do you think that is a suitable fine or should they increase or decrease?
Gonzales: I think it’s enough to get their attention for that first offense. It’s so difficult to prove that employers willfully misclassified because they can claim that they just didn’t know the law and in some jurisdictions that excuse will be accepted.
Comp Blog: A 2009 report by the Government Accountability Office (GAO) estimated independent contractor misclassification cost federal revenues $2.72 billion in 2006. The GAO’s estimate was derived from data reported by the IRS in 1984, finding that 15 percent of employers misclassified 3.4 million workers at a cost of $1.6 billion (in 1984 dollars). From 2000 to 2007, the number of misclassified workers identified by state audits increased from approximately 106,000 workers to over 150,000 workers. These counts likely undercount the overall number of misclassified employees because states generally audit less than 2% of employers each year. The Questionable Employment Tax Practice initiative, a partnership between some states and the IRS, assessed approximately $50 million in taxes between June 2009 and June 2012.
Given those numbers, what do you think of modification to the IRS’s “Safe Harbor” rules? The rules currently allow employers significant leeway to treat workers as independent contractors for employment tax purposes. Past proposals would permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law.
Gonzales: I think that would be a significant additional deterrent. Any way that we can tie these issues to things that employers already know about, like employment taxes, is going to help us out tremendously.