New rules would help to prevent worker misclassification in the construction industry

Minnesota needs rigorous rules if it expects to effectively crack down on fraudulent misclassification of “independent contractors,” union representatives and contractors told a public hearing Monday.

Supporters and opponents gave dramatically different opinions about new rules the Department of Labor and Industry hopes to put into effect on Jan. 1.

At stake is enforcement of a state law that distinguishes between workers who truly are in business for themselves and workers who actually should be payroll employees.

It’s no small issue: About 1 in 7 Minnesota employers misclassifies workers, said Deb Junod, project manager in the Office of the Legislative Auditor.

Misclassification gives cheaters an advantage

Misclassification deprives the state of tax revenue and has other negative consequences, Junod said. Employers who misclassify workers dodge legal and payroll responsibilities. That cuts their costs by an estimated 26 percent, she said, and gives them an unfair edge over competitors.

Construction unions favor the proposed rules, pointing out that if legitimate contractors can’t compete, they don’t win bids and union members don’t work. In many sectors of the construction industry, the rate of misclassification is higher than average – about 1 in 3, according to an in-depth study Junod’s office released last year.

“Our members compete daily against misclassified contractors. It puts them at a significant competitive disadvantage,” said John Nesse, attorney for the Minnesota Drywall and Plasterers Association and the Minnesota Floor Coverers Association.

Nesse and Gary Thaden, representing the Minnesota Mechanical Contractors Association, urged the administrative law judge to uphold the Department of Labor and Industry’s proposed set of rules.

“The rules will determine whether the system will work,” Nesse said. “We need a high standard.”

Rules make distinctions clear

The proposed rules require applicants who want to work as independent contractors to provide business forms, tax records and other documentation that proves they meet the nine requirements in state law. If they meet those requirements, the state will certify them. If they don’t meet all nine requirements, they are considered employees.

No construction contractor can hire an independent contractor unless the worker can produce the state certificate. Among the requirements in state law, independent contractors must be in business for themselves; must control how, when and where they do their job; and must incur their own expenses.

However, the current law “is widely ignored and seldom enforced,” said Kyle Makarios, political director for the North Central States Regional Council of Carpenters. That’s why the state needs rigorous and thorough rules, he said. The proposed certification process, he said, enforces the law up-front and “allows the department to weed out individuals who don’t meet” the criteria.

“These rules don’t set a new standard,” Nesse said. “They seek to enforce the existing one.”

Paperwork becomes an issue

But some employer groups say the proposed rules go too far.

“We’re looking at a lot of things that are redundant, duplicative and burdensome,” said Mike Hickey, lobbyist for the National Federation of Independent Businesses Minnesota. Hickey said the rules, rather than encouraging individuals to comply with the law, could drive them further into the underground economy.

Pam Weaver, executive vice president for the Builders Association of Minnesota, urged the administrative law judge to gut most of the rules. She argued that Labor and Industry overstepped its legal authority in crafting such an extensive set of rules, that the proposed rules are too subjective, and that the “excessive documentation” requires applicants to reveal too much financial and proprietary information.

“BAM is not opposed to a certificate or to requiring some documentation,” Weaver said. “But the way the department put the rule together is much too intrusive to individuals.”

Labor and Industry representatives say the proposed rules give applicants plenty of flexibility. Nancy Leppink, general counsel for the department, disputed that the rules impose much of a burden, saying they make it clear who is actually operating a legitimate business by seeking information that “the applicant would have already prepared or maintained as part of doing business.”

The Carpenters’ Makarios said that if Labor and Industry can’t set up a “rigorous review process,” the state runs the risk of certifying individuals who are not independent contractors. That, he said, “could make the problem worse.”

Administrative law judge Bruce Johnson is expected to issue his decision by early July.

Michael Kuchta is communications coordinator for the North Central States Regional Council of Carpenters.