A bill that begins to address employee misclassification within the construction industry has drawn fierce criticism from personal employment agencies, who say it would force them to upend their existing business models.
Assembly Bill 227 makes it clearer in statute that any work requiring a contractor’s license must be performed by a licensed contractor or by an employee of a licensed contractor. An ambiguous phrase — “and others” — included within existing state statute is being used as justification for using workers who are not considered employees of the contractor in charge of a project. This group of workers includes cash workers who are paid “under the table,” gig workers who are paid through an IRS 1099 form, and temporary workers brought on site through a contract with a personal employment agency.
Proponents say the bill clarifies what has long been the position of the Nevada State Contractors Board, which licenses contractors and disciplines bad actors within the industry. That position, they say, needs to be clarified after an unfavorable court ruling against the Contractors Board in January by Washoe County District Court Judge David Hardy.
“We have always interpreted (statute as meaning) W2-W4 employees,” said Louis Ling, attorney for the Contractors Board. “We have seen leased employees in the last few years. We need to address that through this bill.”
Judge Hardy ruled the Contractors Board was engaging in ad hoc rulemaking because of the ambiguous wording in existing state statute.
Added Ling, “We want to say what we mean. Employee means employee. Means W2s and W4s. … This clarifies it once and for all and as clear as can be.”
Leased employees are workers employed by a personal employment agency who provides temporary labor for construction companies. These employees receive their paychecks from the employment agency, not directly from the contractor whose site they are working on. Yet they take direction and are supervised by the contractor whose site they are on.
Southern Nevada Building Trades Union Executive-Treasurer William Stanley, who presented the bill during a Senate committee hearing last week, said this practice amounts to employee misclassification. It allows companies to offer low-ball bids for construction projects, which hurts skilled laborers within the industry. And it results in millions of dollars lost annually in state revenue.
AB227 is supported by a variety of trade unions and groups, including the AFL-CIO, the Unified Construction Industry Council and numerous chapters of the International Brotherhood of Electrical Workers.
McDonald Carano lobbyist Josh Hicks on behalf of the American Staffing Association told lawmakers that personal employment agencies have been providing workers to construction sites for decades in response to labor shortages. AB227 would restrict agencies to providing only unskilled labor.
“They have existing contracts in place for that kind of labor,” he added. “This (bill) is effective on passage and approval. Those will be impacted.”
American Staffing Association includes nine licensed personal employment agencies in Nevada, according to Hicks, and combined they employ more than 4,300 skilled or semi-skilled laborers. More than 30,000 Nevadans work through personal employment agencies.
Lawmakers during the bill’s most recent hearing appeared receptive to those concerns.
“They have been afforded the opportunity to function in that way,” said Democratic state Sen. Dina Neal. “Now we are clarifying: You can do cleanup (because it does not require a contractor’s license) but now you have to be under the contractor or be under this umbrella (for other tasks) in order to continue to exist. … There is a business impact. There is a model that is being adjusted.”
Republican state Sen. Keith Pickard wondered if some companies might decide to simply not offer construction labor at all.
“Under this rule they would have to transfer employment to the contractor, now they lose their source of income because they’re not allowed the markup,” he said.
Stanley acknowledged that personal employment agencies would be impacted, but he noted that AB227 doesn’t ban their involvement wholly. An agency might consider obtaining their own contractor license, which is theoretically possible and would allow them to legally lease their employees to the construction companies that need them. Or they might change their payment structure to include upfront fees rather than relying on the hourly rate.
“Nothing in this bill predicates or predicts a loss of a single construction job in the state of Nevada,” said Stanley. “This proposed language simply determines who is the employer of record at the site of the construction work.”
Stanley believes that’s simply good public policy because it allows for the right person to be held responsible, especially if something goes awry and some kind of recourse is needed. It would, for example, streamline investigations over unpaid wages or other disputes because the Labor Commissioner or Contractors Board wouldn’t have to track down the financial relationships between various involved parties. It would — or should — be obvious.
In an interview with the Current he also pushed back against the idea that personal employment agencies have always been an established staple.
“We are the experts in the construction industry,” said Stanley. “We would have known. It’s a new phenomenon. It’s a way contractors are trying to offboard their employee costs.”
Things like workers comp, liability insurance and bonding are affected by payroll costs. Paying for labor through a 1099, whether directly to a worker or indirectly by paying an agency, is a loophole for cheaper rates, he said.
“These contractors would not be using these agencies if they cost them more money,” said Stanley. “That’s the bottom line. Simple Business 101. That’s Economics 101.”
A recent report from the Institute for Construction Economic Research using 2018 data estimates that a legal employer within the construction industry pays between 18.4% and 38.3% more per worker than an employer who engages in payroll fraud. In real numbers: the total employment costs for a legal worker is estimated at $47,486 while the total employment costs for a misclassified worker are estimated at between $34,331 and $40,110.
By comparing what workers report about their employment to what employers report about their payrolls, researchers estimate the state has 19,870 independent contractors and off-the-book workers within the construction industry alone. The majority of these workers are likely misclassified.
That results in businesses paying less in unemployment insurance, workers compensation and modified business tax — to the tune of $49.5 million annually.
University of Nevada Las Vegas Economics Department Chair Jeff Waddoups was one of the lead researchers on that report.
These recent findings align with previous findings, including a study completed by an interim legislative committee leading up to the 2011 Legislative Session. That report included a conservative estimate of 31,000 misclassified workers across all industries in Nevada. Prompted by that report, the Democratic-controlled Legislature passed two bills aimed at addressing the issues and recommendations from the interim. Those bills were vetoed by Repubican Gov. Brian Sandoval.
The 2019 Legislature revived the issue, creating a task force to study the issue of misclassification. That task force’s recommendations are due to the Legislature by July.
In the meantime, this session’s AB227 has passed the full Assembly on a party-line vote on April 2 and received a hearing in the Senate Commerce and Labor Committee on Friday. No action was taken.
The bill has until May 14 to pass out of the senate committee, per legislative deadlines.