On Monday this week I presented testimony in support of House Bill 2372, a bill I introduced earlier this session in the Kansas House. This legislation seeks to address “1099 misclassification” issues.
1099 (or independent contractor) misclassification occurs when an employer treats a worker as an independent contractor instead of an employee. This allows the employer to avoid paying social security, workers compensation, unemployment insurance, liability insurance, and both overtime and time-off wages. It also often results in the so-called independent contractor failing to properly withhold and report his / her personal federal and state income tax withholdings.
1099 misclassification is rampant throughout the nation and our own state of Kansas, particularly in the commercial and residential construction industries. PriceWaterhouse Coopers, in a report titled “Projection of the Loss of Federal Tax Revenue due to Misclassification of Workers”, projected annual losses of between $2.5 billion and $4.7 billion in federal revenues between 1996 and 2004 due to the misclassification of workers. Estimates for the Commonwealth of Massachussetts in 1997 alone indicate that $68.3 million was lost in state income tax revenue due to 32,000 workers being misclassified in the construction industry.
There are certain legitimate work situations where an employer may not know how to classify a laborer. In response, the IRS has for several years provided a twenty-question test to assist employers in determining whether a laborer should be treated as an employee or independent contractor. In the case of the residential and commercial construction industries, however, the simple fact is that if a construction worker takes direction from an employer’s representative and is installing employer-supplied material, then that worker should be treated as an employee. The only reason that the worker is misclassified is to realize substantial savings for the employer.
These employer benefits have a direct and negative impact on the worker. Misclassification results in no social security benefits, no workers compensation coverage, no health insurance, no unemployment insurance, no overtime wages, and very often substandard wages and health and safety on the job. Unfortunately, misclassification has helped to promote an underground economy in many parts of the construction industry. Compounding the problem is the fact that many workers, once classified as independent contractors, are typically reluctant to demand legal employee status because of tax obligations they have incurred. This reluctancy only helps to perpetuate the practice.
House Bill 2372 provides the Kansas Department of Revenue with a number of tools for investigating and prosecuting those employers who knowingly violate the law under this act. The bill, if enacted, would:
a) establish criminal penalties fort those employers who misclassify an employee (class A non-person misdemeanor);
b) establish a toll free 800 number and website for the Kansas Department of Revenue and Kansas Department of Labor to jointly receive communications concerning information on persons and businesses misclassifying workers;
c) assign an assistant attorney general to the Kansas Department of Revenue to investigate and prosecute cases; and
d) allow the KDOR to share income tax information with the KDOL.
My intentions in introducing this legislation are three-fold: 1) to protect honest Kansas small businesses who are having to compete on an unlevel playing field, 2) to protect Kansas workers from suffering continued wage erosion and exploitation, and 3) to stop the resulting loss of state income tax collections to the state of Kansas. I sincerely hope that through passage of HB 2372 we can implement this “responsible employer” statute and begin to honestly confront this incredibly destructive practice.