Contract labor or employee? The Louisiana Workforce Commission targets high-risk companies to weed out misclassifications.

(Photography by Don Kadair: former Louisiana Workforce Commission Executive Director Curt Eysink)

Editor’s note: This story has been updated since original publication to include comment from new Louisiana Workforce Commission Executive Director Ava Dejoie. 

Taking advantage of relaxed U.S. Department of Labor guidelines that now allow for risk-based audits, the Louisiana Workforce Commission has racked up some impressive numbers in tracking down businesses that improperly classify employees.

To date, LWC audits have identified nearly 9,400 employees statewide that have been misclassified as contract labor.

“I can’t give you specifics, but based on what’s in the hopper and what we think will close out before the end of the year, we will blow way past the 12,800 we found in 2014,” says Curt Eysink, who at press time was executive director of the LWC.

Companies improperly classifying employees avoid paying unemployment insurance, thereby giving them an unfair advantage over competitors. While LWC is not seeking to determine intent, it requires those businesses in violation to retroactively pay taxes owed, plus penalties and interest.

So far, LWC auditors have identified about $83 million in under-reported wages in 2015, resulting in the collection of more than $923,000 in unemployment insurance taxes owed by employers. This puts Louisiana in first place nationwide for misclassified workers identified per audit, according to U.S. Department of Labor statistics.

Beginning in 2011, LWC has aimed its auditing guns on companies with a historically high probability of violating the law, based on a “total risk profile.” Softened federal guidelines have allowed LWC to work cooperatively with the Internal Revenue Service, Louisiana Department of Revenue, the Louisiana Office of Worker’s Compensation and the Department of Labor to identify those companies with the greatest potential for misclassifying workers.

Louisiana’s “Fair Play Act,” enacted July 2013, provides additional muscle by allowing LWC to impose stiffer penalties.

Before 2011, LWC was required to perform random audits, which brought meager results: In 2010, only 283 misclassified workers were identified.

“Now, if they [other agencies] find issues in their audits that might have a bearing on the issues that we regulate, that’s a red flag,” says Ricky Masaracchia, LWC’s unemployment insurance deputy director. He says these red flags are consistently found in two rather large business sectors—construction and hospitality, where companies are more likely to outsource work or hire temporary workers.

SIZE MATTERS

Jeffrey Rusich, human resources director for industrial contractor GROUP Industries in Baton Rouge, suspects most of the infractions in the construction sector are among smaller, residential or commercial companies. He says larger contractors—particularly those in the industrial sector—should have no difficulty differentiating between contract labor and employees.

“For a larger company, it should be pretty clear cut,” Rusich says. “The individuals I hire have to meet not only my prehire qualifications, but our clients’ prehire qualifications. This leaves little doubt about who is an employee versus a contract worker.”

But he notes that’s typically not the case for the smaller contractor. “It’s the small guy who can’t afford to pay that type of insurance,” Rusich says. “These small contractors will typically contract out their labor, and they’ll 1099 the guys at the end of the year so they’re not taxed on their gross profit.”

While LWC’s Eysink couldn’t provide information as to the size of the companies included in the audits, he stresses that most companies are in compliance with the law. “We’re not painting everyone in those industries as having offenses because that’s certainly not the case. Only about half of the audits that we go on [in the high risk group] do we find this.”

If an audit determines that a misclassification has occurred, LWC presumes that it was based on negligence rather than intent. First-time offenders are simply issued a warning letter, then forced to pay back taxes with penalties and interest. However, fines are levied for multiple offenses ($250 per employee for second offense, $500 for third offense, $1,000 for fourth offense), with prosecution for the fifth offense.

Rusich says while some smaller businesses simply could be ignorant of the law, it’s not for lack of available information. “There are so many resources out there for a company,” he adds. “Still, I’m not going to say it’s intentional; it could be due to a lack of knowledge in that area.” LWC’s website provides a simplified checklist that permits a company to easily determine the proper classification of a worker. A help line is also available.

Gretchen McKinney, immediate past state director of the Louisiana Society for Human Resource Management, says her group will host educational sessions for individuals and businesses wanting to know more about compliance during its annual Human Resource Conference from April 7 to April 8 at the Cajundome in Lafayette.

Proper worker classification is a “hot topic” among LSHRM members, as well as at the City of Mandeville, where she serves as human resources director. “We’ve had a number of discussions here at the City of Mandeville, where we’ve had contracts reviewed to make sure that workers are properly classified as employees,” she says. “It has been a large discussion here.”

By ramping up its audits, LWC’s ultimate goal is to ensure a level playing field for those companies that follow the letter of the law. Perhaps more importantly, Eysink says, “we want to ensure that an employee legally entitled to a benefit is able to get that benefit when it’s due.”

Ava Dejoie, who was appointed the LWC’s new executive director in early January by Gov. John Bel Edwards, says the agency plans to continue audits of Louisiana companies under the new administration to ensure compliance with the law.

“We want to be sure that every worker in Louisiana is provided with all benefits to which they are entitled under the law, and are committed to communicating with employers the absolute necessity to properly classify their employees and pay the unemployment taxes for which they are obligated,” Dejoie says in a prepared statement.

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