Hiring people as independent contractors instead of employees is one strategy commonly used by businesses to their reduce expenses and maximize their profits.
But there are some problems with that. For one thing, it may be illegal.
This practice, whether intentional or unintentional, is called employee misclassification. Some Nevada legislators believe it costs the state millions of dollars in lost revenue and denies thousands of workers the employment benefits and protections they are legally entitled to.
SB 493 would start to address the problem by creating a task force to study the issue. An amendment proposed by Teamsters International would also create a series of escalating administrative fines and punitive measures for businesses found violating employee classification guidelines.
The bill received its first hearing Wednesday at the Senate Commerce and Labor Committee. The bill as introduced received mixed reactions from committee members, while the amendment detailing punitive measures was opposed by lobbyists representing business.
Sponsor Sen. Marilyn Dondero Loop and Ali Anderson from Teamsters characterized the bill in their presentation to the committee as a way for the state to take action against “bad actors” who are exploiting independent contractors in order to get around paying workman’s compensation, unemployment insurance, healthcare and retirement benefits, and other costs typically shouldered by businesses who hire employees.
Anderson testified that employers can save up to 30 percent on their own expenses by hiring workers as independent contractors, but that cost savings is simply a result of shifting certain financial burdens over to the worker.
“(Independent contractors) make less money because of the costs associated with that shift,” said Anderson. “They are responsible for more costs — operating expenses that would normally fall to the employer.”
It’s believed that more than 5 million employees are misclassified nationwide, resulting in $4.7 billion of lost revenue to the federal government and millions of dollars to each state.
In 2011, the Nevada Legislative Counsel Bureau used Nevada Employment Security Division investigation and audit data to conservatively estimate that approximately 31,000 Nevadans may be misclassified. That would translate to an estimated $8.2 million annually in lost revenue to the unemployment trust fund.
Not all independent contractors or freelancers are misclassified. Watchdogs of employee misclassification argue the guidelines are clear and that enforcement of those guidelines ensures better working conditions for all workers.
To determine proper employee classification, many states, including Nevada, have adopted what is commonly referred to as “the ABC test.” The National Employment Law Project describes the ABC test as the presumption that a worker is an employee unless the employer can prove the following: (a) an individual is free from control or direction over performance of the work, (b) the service provided is outside the usual course of the business for which it is performed; and (c) an individual is customarily engaged in an independently established trade, occupation or business.
The ABC test is intended to be simple and straightforward, but it has garnered a fair amount of controversy. Critics have sensationalized it as “the end of independent contractors” and warned it creates myriad issues for industries where independent contractors are the standard. Real estate agents and brokers, nail technicians and hair stylists, taxi cab drivers and truckers, personal trainers, strippers and performers are some workers who are more often than not independent contractors rather than employees.
Sen. Joe Hardy raised such concerns at the bill hearing on Wednesday.
“Why would you hire anyone as an independent contractor? It’s a dangerous position for an employer when you can be held critically liable.”
Labor unions in the construction industry and trades have typically been most vocal about the need to crack down on employee misclassification, making the case that the illegal but oft-overlooked practice allows unreputable businesses to undercut legitimate ones by offering low-balled bids on public works projects.
However, as noted earlier, employee misclassification has infiltrated far beyond those industries.
One study found a 7 percent increase in employee misclassification between 2004 to 2009. Thanks to the rise of the so-called “gig economy” and a far-reaching economic recession that inspired businesses to cut costs wherever they could, it is believed the practice has become even more over commonplace over the past decade.
Uber launched in 2010 and has brought mainstream attention to the issue. A years-long lawsuit in California recently settled with the rideshare company being allowed to continue to classify its workers as independent contractors but shelling out $20 million to drivers who believed they should be considered employees.
In October, the Current reported that dozens of bartenders and staff at the Route 91 Harvest Festival had been misclassified as independent contractors by the unregistered staffing company that hired and managed them to work the three-day festival. In the days, weeks and months following the 1 October mass shooting, those workers struggled to obtain money owed to them, and they found themselves lacking resources like workman’s compensation that an employee would have had. Most would only speak about their experience anonymously because they were afraid of being blacklisted for criticizing what they say is common practice in the event staffing industry.
In that case, the Office of the Labor Commissioner fined the unregistered event staffing company and secured some back pay for the affected workers. The unregistered event staffing company proactively ceased operations after the country music festival.
The Labor Commissioner is one of several state agencies that deals with employee misclassification. The Department of Employment, Training and Rehabilitation (DETR), the Department of Taxation and the Attorney General also deal with the issue. SB 493 would bring these agencies together to collaborate, evaluate policies and offer to the next Legislature recommendations on reducing employee misclassification.
The bill picks up where the 2011 Legislature left off. That year, legislators passed a bill creating a task force focused on employee misclassification. It was vetoed by Gov. Brian Sandoval, who wrote the bill “unnecessarily complicates an already intricate regulatory scheme.”