Wednesday, September 10, 2014

Did Dirkson Have it Right?

Everett Dirkson was a United States Representative and Senator. According to the Dirkson Center, he had a hand in the passage of some monumental legislation like the Civil Rights Act of 1964 and the Voting Rights Act of 1965. He is also credited with the quote "a billion here, a billion there, and pretty soon you are talking about real money." The word "billion" used to get attention, but the impact has been diminished by the invasion of "trillion" into our modern vernacular. Trillions are perhaps so large that we just cannot comprehend these figures anymore. Our national debt for example has expanded by roughly one trillion dollars each year over the last six years.  


With that backdrop, can we get excited about a measly billion dollars? There is a story in the news this week that concludes that "misclassification" and other fraud "diverts nearly $1 billion from " Florida's economy annually according to Florida CFO Jeff Atwater. Perhaps we could and should get excited about a mere billion dollars? 


I wrote a blog some days ago about "ghost policies," which drew an intriguing response from attorney David Wiitala. He lamented that he experiences a similar process, which he labels "phantom employers and borrowed certificates." He describes that contractors want their subcontractors to have coverage and so the require them to each present a certificate of insurance. So someone wanting that work could buy workers' compensation insurance. But he tells me that some instead "rent" a certificate of insurance. The contention is that workers' compensation coverage is expensive.

The business providing that certificate (the "provider" or "facilitator") does business in its company name with the contractor and is paid by the contractor, with checks made out to the certificate provider. The work is not done by the provider, however, but by the employer (sub contractor) "renting" that certificate. The employer/sub contractor takes those contractor-issued checks to the provider, which cashes them and allegedly keeps a percentage of the total as compensation for providing the certificate of insurance. 

Mr. Wiitala says that this process has also been employed by former employees of contractors. These individual employees are told that they cannot continue as employees, but are allowed to work on the contractor's job site if they each obtain their own individual certificate as proof they are covered as a subcontractor. In this instance, he says employees may go out and procure a similar certificate through a rental agreement with someone as described in the scenario above. 


Misclassification is a term regularly used to describe a practice of identifying employees as independent contractors. There has been a fair amount written on the subject. A September 4, 2014 article in South Carolina provides an amazing amount of detail, and outlines how the process affects employers, government and taxpayers. A Wisconsin blog by DomerLaw also has several interesting posts on the subject. 

The news this week has included a story about exotic dancers in South Carolina and their efforts to be considered "employees" and all that would entail in terms of pay, overtime, and insurance coverage including workers' compensation. The news last week included a story on problems with misclassification that was centered on payroll taxes.  Part of the issue of misclassification may be that the definitions to qualify as an independent contractor for payroll purposes under the Fair Labor Standard Act may not be the same as those under a particular state's workers' compensation law. Thus, one might legally be an independent contractor for one purpose (payroll) but not another (workers' compensation) or vice versa. 


Florida is well familiar with the tribulations of misclassification, and extensive legislative effort has been focused on curtailing it. In 1991 the definition of "employee" was refined in Section 440.02, F.S. to clarify that "independent contractors" were not employees if they did not act "subject to the control and direction of the employer." The legislature amended that section/definition again in 1994 inserting a litany of requirements for anyone to be an "independent contractor." That litany was further refined in the 2003 statutory amendments. In short, the qualifications for being an independent contractor under Florida law have become increasingly specific. 

Our statute has long required coverage for companies with four employees or more, since 1990; prior to that it was three or more. But in 1989 language was added so that coverage is required for employers with one employee or more if the employer is engaged in the construction industry. This is another legislative effort to hone the requirement for coverage and the independent contractor issue at least in the construction industry. 

This week brings three interesting news stories that are related to the phenomena of misclassification. The first story is Florida focused and further describes the process brought to my attention by Mr. Wiitala, intended to avoid workers' compensation costs. This story by the Miami Herald describes this practice as "the Florida Plan," which it says is "a complicated and illegal scheme to avoid paying workers' compensation premiums." 

Similarly to Mr. Wiitala, the story describe a "facilitator" who opens a "shell company" which does no construction work and has no employees, but which does have a workers' compensation policy that they bought cheap (because it has few or no employees, see the "ghost policy" concept). The facilitator then "rents the shell company's name and insurance" to those without coverage, just as described by Mr. Wiitala. According to the article some "facilitators" have run networks as large as 10 concurrent shell companies to market "the Florida Plan." One facilitator's scheme described in the article "allowed uninsured subcontractors to work on more than 1,600 projects and collect more than $73 million in contracts." A side note, those subcontractors who avoid the costs of workers' compensation coverage can perhaps underbid other subcontractors who have coverage. 

An old cliche goes "its all fun and games until someone loses an eye." You can imagine that these "shells" only work until someone gets hurt and a claim is filed. Then the shell company was "burned" and a new company is set-up "so investigators couldn't trace" the facilitator. This leaves the injured worker in a very tough situation. Joseph Barrs is featured in the Herald article. Electrocuted and injured in a resulting fall from scaffold, according to the Herald, he found himself in a legal battle regarding the actual identity of his employer; a battle about who should pay for his injuries. 


The second story this week is from South Dakota (S.D.) where insurance carriers have been focused on misclassification issues. There, through audits, carriers have been identifying people they believe to be employees misclassified as independent contractors. The S.D. Division has concluded that carriers there are being too aggressive, and are consequently collecting premium for people who actually are independent contractors. They sent out a memorandum recently and told the carriers that they each must have defined processes for determining contractor status. 

A third story today on Workcompcentral says that Illinois has just taken efforts to better document independent contractors. They are requiring contractors to do more record keeping and reporting. The details are on page 18,500 of the State Register. Contractors will be reporting "any individual performing services" and the reporting will include that person's "business identification number and federal employer identification number." These efforts add a level of bureaucracy and accounting, which bring with them some cost. But, what law enforcement does not? 


So added to our knowledge base recently is the "ghost policy" and now "phantom employers and borrowed certificates" and "the Florida Plan." We are told that misclassification and other fraud are diverting about $1 billion annually from Florida's economy. Will Florida adopt Dirkson's logic, conclude that eventually this could amount to "real money," and put a stop to it? Would such an enforcement effort be a benefit to honest businesses who cover their workers for injuries with legitimate workers' compensation policies? 

Say what you will about workers' compensation. Obviously I find it interesting or you would not see my thoughts here periodically. But on a more profound level this concept that is workers' compensation provides a a safety net for employers and employees and makes their efforts more likely to be stable and predictable. Practices that are criminal, which create uncertainty in people's lives, deserve the state's attention. 


Links to other recent stories:

North Carolina

South Dakota

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