Legislature again tackles employers’ use of independent contractors

CARSON CITY — A politically charged issue involving the possible misuse of independent contractors by some Nevada businesses is about to rear its head again in the Legislature.

A package of bills seeking to curb alleged abuses of the independent contractor system, called misclassification, created a bitter partisan battle in the 2011 session, pitting labor groups against pro-business organizations and Democrats against Republicans.

Two bills seeking to identify and penalize employers who misuse independent contractors were passed by the Democrat-controlled Legislature, only to be vetoed by Gov. Brian Sandoval, a Republican.

In his veto messages, Sandoval called the penalties for violations excessive and duplicative and said that the tools needed to go after violators already exist.

But the bills are back this session in the form of Senate Bills 95 and 96. Hearings have not been scheduled for either measure.

Employee misclassification occurs when employers intentionally misclassify employees as independent contractors to avoid their legal obligations under federal and state labor employment and tax laws.

The issue is potentially significant because of tax revenue and fees lost to the state and because businesses that hire their own employees and follow the rules could be put at a competitive disadvantage.

Businesses using independent contractors do not pay unemployment insurance, workers compensation and many other fees and taxes that must be paid by those businesses that operate with employees.

LAWMAKER LOOKS FOR COMPROMISE

Despite the vitriol on the issue two years ago, Sen. Kelvin Atkinson, D-North Las Vegas, who serves as chairman of the Senate Commerce, Labor and Energy Committee, said this week he wants to see whether a compromise can be found to correct abuses from misclassification.

“What I have understood is that everyone does recognize that misclassifications exist, and they do understand that there is a problem,” he said. “How do we fix that is a bone of contention with some folks.”

Sandoval’s veto messages recognized there are some legitimate concerns that could be a starting point for compromise, Atkinson said.

“Maybe we’ll take a stab at it and meet with some of our Republican colleagues this time and try to see if there is any way to get some bipartisanship for these bills,” he said.

Sen. Mark Hutchison, R-Las Vegas, an attorney and member of the Commerce Committee, said there is a long history of court rulings defining who is an employee and who is an independent contractor.

So the first question is whether there is a problem with misclassification in Nevada, he said.

“I’m a lawyer, I look at evidence, and I’d have to be shown first there is a problem with employers misclassifying employees,” Hutchison said. “And then if, in fact, there is a problem, now what’s the solution for that?

“And I think that is where Sen. Atkinson is right,” he said. “If there is a problem, then we’re all interested in trying to resolve that problem. And we have to find a way in which to do that cooperatively.”

The 2011 misclassification bills came out of an interim legislative study led by former Sen. Shirley Breeden, D-Henderson. In the 2011 Senate Commerce hearing, she said the practice costs the state millions in uncollected taxes and takes advantage of workers who should be classified as employees.

The state Employment Security Division, which oversees the unemployment insurance program, provided some data to the interim study panel based on audits and investigations and found that 2.7 percent of audited employment was misclassified.

“This gives a conservative estimate of approximately 31,000 Nevadans that may be misclassified,” Breeden said in 2011. “From these numbers, the estimated annual revenue lost to the unemployment trust fund alone may be as much as $8 million.”

BUSINESS, LABOR VIEWS

Randi Thompson, state director of the National Federation of Independent Business, said the organization does not oppose cracking down on those who abuse the system. But there are already laws in place to deal with those cases, she said.

The concern is that the legislation is really seeking to limit the use of independent contractors by Nevada businesses, Thompson said. “There is a federal definition of independent contractor that works just fine,” she said. “These bills would go far beyond that.”

Unions want to limit the use of independent contractors because they can’t be organized, Thompson said.

The other concern with the measures is that even for a business that unintentionally violates the rules, a fine would be imposed on the first offense, she said.

Of the 220,000-plus small businesses in Nevada, 80 percent of them don’t have any employees. Thus, independent contractors are a significant part of Nevada’s economy, Thompson said.

“When it comes to people choosing the way they want to work, government should not prohibit that,” she said.

State AFL-CIO leader Danny Thompson said the issue needs to be addressed in the Legislature in part because it creates an unfair advantage for those who use independent contractors. Businesses that rely on independent contractors don’t pay the modified business tax, workers compensation, unemployment insurance or Social Security taxes, he said.

Danny Thompson said that if an independent contractor is hurt on the job, that worker will end up using a workers’ compensation uninsured fund, which is supported by employers who pay for workers’ compensation coverage. Those rates then rise for all businesses that pay for the coverage for their employees, he said.

Independent contractors are supposed to pay for their own workers’ compensation coverage, but most don’t, Thompson said.

“So that’s the problem that really needs to be addressed in a meaningful way,” he said.

Contact Capital Bureau reporter Sean Whaley at swhaley@reviewjournal.com or 775-687-3900.