Misclassifying employees as independent contractors can leave injured laborers in a bind
By Kerry Singe
James Morrison was on a roof cleaning tree debris five years ago when he stepped onto a ladder that slipped and sent him tumbling to the ground, breaking his leg and injuring his knee.
The Salisbury company he was working for didn’t have workers’ compensation insurance, and the owner said Morrison wasn’t an employee but an independent contractor responsible for buying his own policy.
The N.C. Industrial Commission ruled against the company, saying it should have provided the insurance.
Morrison is one of dozens of Charlotte-area workers who are injured each year only to find they don’t have proper coverage.
His case also underscores wide-ranging problems in the world of workers’ compensation – from companies that misclassify employees to avoid buying them coverage, to employers that simply don’t cover workers despite regulations that require it.
Companies that misclassify employees avoid paying Social Security, Medicare and unemployment taxes and taking tax withholdings from paychecks.
“It’s a fairly common scenario,” said Bob Bollinger, a Charlotte-based attorney who is handling Morrison’s case. “The government’s getting cheated, the taxpayers are getting cheated, the injured worker is getting cheated and the employer’s getting away with it.”
Others use a loophole in the law, buying a “ghost policy,” a type of coverage that makes it appear workers are insured when they are not. Such policies are legal in North Carolina.
People familiar with the situation say the poor economy is driving more employers to cut corners and avoid buying workers’ compensation insurance.
The practice occurs most often in professions that have relatively more injuries, such as the construction, trucking and tree-trimming trades, industries prominent in Charlotte.
Workers’ compensation insurance for office workers, such as accountants and salespeople, is considerably cheaper, according to insurance agents.
A (Raleigh) News & Observer investigation last spring found that at least 30,000 businesses in North Carolina that are required to have workers’ compensation coverage don’t have it.
In Charlotte, hail in April 2011 hammered people’s homes, creating a windfall for local roofers. Business boomed, and workers flocked to the area. The high demand meant local contractors could earn more money per job.
Once the work slowed, prices fell. One Charlotte-area roofing contractor said the price one company was recently willing to pay for a job is lower than her labor costs. The only way someone could make a living at that price is if they drastically cut operating expenses, she said. She declined to pursue the job.
She buys workers’ compensation insurance for her employees, an expensive item accounting for about a quarter of her overall costs. She asked not to be named because she fears retaliation within the industry. She said this year she has struggled to compete with contractors who don’t pay for similar insurance.
“It was not enough to cover expenses,” she said. “I understand there’s not much work and sometimes you have to take what they can offer. But as a contractor, we have to be responsible for our people.”
In North Carolina, businesses with three or more employees are required to buy insurance or certify with state regulators that they have enough assets to be self-insured.
In April, the N&O reported that tens of thousands of North Carolina businesses put their employees at risk by failing to buy workers’ compensation insurance. The newspaper analyzed the N.C. Rate Bureau’s database of policies written for companies required to have workers’ comp and found that insurance carriers writing policies in North Carolina reported they covered 140,472 businesses. About 117 large companies are certified as self-insured.
The N.C. Department of Commerce says up to 170,000 companies with four or more employees operate in the state.
Generally, a worker under state regulations should be considered an employee if the company provides tools and equipment and controls how and when the worker is to do the job. The more control the business has over a worker; the more likely it is that the worker is an employee rather than an independent contractor.
In Morrison’s case, the tree-trimming company provided all tools and equipment and controlled Morrison’s work hours, according to documents filed with the N.C. Industrial Commission. Company owner Wayne Allen argued Morrison was self-employed because he could take tax deductions for the costs of commuting and for having a home office.
Deputy Commissioner Robert Rideout Jr. called that assertion “disingenuous at best,” writing in his decision that “commuting mileage is not a tax deduction and furthermore, Mr. Morrison would have no need for a home office if he was simply working as a laborer for a tree service.”
Allen told the Observer that that day was the only time in his business’ history that he had three people working for him. Normally he has only two people, he said, which would mean he is not required by law to purchase workers’ compensation insurance.
“It was a violation that day,” Allen said.
Allen said the worker claimed tax deductions based on being self-employed. He said Morrison had a previous knee injury and questions the motive behind the worker’s pursuing of a claim with the state Industrial Commission.
Allen said he once looked into buying insurance and said it would have cost roughly $1 for every $3 the company made. He is still in business and continues to use only two workers, he says.
“There’s no way you can charge enough from the customer to cover workman’s comp,” he said.
Industry put under stress
Julian Arcila with the Hispanic Contractors Association of the Carolinas said his group is trying to educate members about the consequences of not providing the proper coverage. Lately, he said, he’s been hearing from more members concerned about the growing number of workers who aren’t covered by workers’ compensation insurance.
“They say they can’t compete because houses are built by guys who are not paying insurance,” said Arcila, who is based in Charlotte. “It is changing the shape of the construction industry.”
The Charlotte roofing contractor who didn’t want to be named said many of her former colleagues have closed their companies and switched to operating as independent contractors themselves to stay in business.
‘A chilling effect’ on claims
Charlotte attorney Mark Sumwalt now sees about 25 cases a year involving workers who were misclassified as independent contractors, a significant increase from past years.
“Rarely are they truly independent contractors,” he said. “People are trying to cut every corner they can. … Worker’s compensation is a regulatory requirement. You’re not supposed to be able to make a decision about it.”
Even when an uninsured worker is injured and sues a company, arguing it should have provided coverage, Sumwalt said, it can be difficult to recover any money. That’s because companies that misclassify employees often don’t have the money to pay for disability claims or medical bills.
“It has a chilling effect on injured workers to pursue claims,” he said.
Morrison, the Salisbury tree trimmer who was injured in 2007 and awarded disability payments and medical coverage for problems stemming from his injury, is still waiting for his money, his attorney says.