Report says employers misusing contractors
By JASON CLAYWORTH • jclayworth@dmreg.com • December 31, 2008

Iowa needs to crack down on employers who abuse contract labor laws, a state task force said in a report made public Tuesday.

Gov. Chet Culver said he supports the conclusions.

The task force is studying concerns about employers who improperly classify workers as independent contractors to save money.


The so-called "misclassification" allows employers to avoid paying at least the minimum wage, overtime pay, and providing family medical leave. Employers also avoid paying Social Security, and unemployment and workers' compensation benefits.

The task force heard testimony relating the problem to the hiring of illegal immigrants.

Independent contractors are often paid in cash, according to the task force's report.

"Employers who do this take the low road to unfair financial advantage over businesses who play by the rules," Culver said. "Workers are the ones who pay the price."

Worker advocates have long said abuse of the law not only fosters unsafe working conditions and unfair compensation for workers but also creates a competitive disadvantage for employers who hire legally.

Culver said enforcement could help return a significant amount of lost revenue to Iowa government, because employers do not withhold income taxes from the pay of independent contractors.

"Any way that the state can generate revenue, I'm for," said Culver, who created the task force in July.

Culver has endorsed the task force's recommendation that the state hire nine employees and spend $771,000 a year to better police misclassification.

Millions of dollars
Some union leaders, minority advocates and Democrats agreed with the proposal. They said it could generate millions of dollars from employers who dodge taxes by improperly classifying workers.

But one Republican leader questioned the wisdom of adding government functions at a time when state revenue is decreasing.

"Once again, the governor and the majority party think it's more important to grow government than to try to protect the taxpayers right now," said House Minority Leader Kraig Paulsen, R-Hiawatha.

Six suggestions
The task force made six recommendations, including tougher enforcement. The committee did not estimate the lost revenue to Iowa. The last Internal Revenue Service study in 1984 estimated the national tax loss at $1.6 billion, or roughly $2.7 billion when adjusted for inflation.

Elisabeth Buck, director of Iowa Workforce Development, led the five-person task force. Her department sampled the construction industry and found about 15 percent of businesses had misclassified workers.

Employers who fail to register employees can face a $500 fine, but there is no penalty for improper classification except to pay back taxes and other fees. There are, however, federal laws that can assess thousands of dollars in fines.

Buck said her department now does not have the resources to deal with the issue.

The problem of misclassified and undocumented workers created spirited debate during the 2008 legislative session, but lawmakers did not act.

'Revenue generator'
It's possible that Iowa will receive hundreds of millions of dollars in federal stimulus money for infrastructure improvements. That will put increased importance upon worker classification, said House Majority Leader Kevin McCarthy, D-Des Moines.

"This would be an expenditure that, I believe, would be a revenue generator for the state," he said.

Buzz Malone, an official with Laborers Union Local 566 in Ottumwa, said he supports the recommendations.

So did Tom Chapman, executive director of the Iowa Catholic Conference, which opposed many of this year's legislative proposals targeting illegal immigration. The task force heard testimony about abuses caused by worker misclassification.

Rory Washburn of the Tri City Building Trades Council told of an injured worker in Davenport who was removed from a hospital by co-workers who feared they would get caught by authorities for working illegally.

Lawmakers will be asked to create the misclassification unit as part of the Workforce Development budget.
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