Call to Order and Roll Call
The 5th meeting of the Interim Joint Committee on Labor and Industry was held on Wednesday, November 30, 2011, at 1:00 PM, in Room 131 of the Capitol Annex. Representative Rick G. Nelson, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Alice Forgy Kerr, Co-Chair; Representative Rick G. Nelson, Co-Chair; Senators Denise Harper Angel, Jerry P. Rhoads, Tim Shaughnessy, Kathy W. Stein, Katie Kratz Stine, Jack Westwood, and Ken Winters; Representatives John A. Arnold Jr., Will Coursey, C. B. Embry Jr., Bill Farmer, Wade Hurt, Joni L. Jenkins, Thomas Kerr, Adam Koenig, Mary Lou Marzian, Charles Miller, Terry Mills, Michael J. Nemes, Tanya Pullin, Tom Riner, and Jim Stewart III.
Guests: Representative Susan Westrom; Ben Kaufmann, Ben C. Kaufmann Agency; Cynthia Bohn, President, Equus Run Vineyard; Steve Bowlds, President, D-C Elevator Co.; Reni Ross, D-C Elevator Co.; Joe Meyer, Secretary, Education and Workforce Development Cabinet; and Larry Roberts, Director, Kentucky State Building and Construction Trades Council.
LRC Staff: Linda Bussell, Adanna Hydes, Carla Montgomery, and Betsy Nickens.
The minutes of July 21, 2011, September 13, 2011, and October 20, 2011 meetings were approved by voice vote.
Unemployment Insurance/Employee Misconduct
Representative Westrom addressed the committee on the importance of small businesses in the Commonwealth. She stated that many small businesses are frustrated with the unemployment insurance (UI) system and should not be forced to bear the burden for bad employees. Even though an employee was guilty of misconduct, the employee still received UI benefits. Ben Kaufman, insurance agency owner, stated he had a small business that has approximately five employees. He stated every time he was forced to let someone go, the employee still received UI benefits. He stated that his head maintence person had been with him for eleven years. Through a GPS system, his agency found the employee was working for others but charging the agency for time. Mr. Kaufman also felt that the employee had taken a mini fridge from the company. The employee threatened members of the company. The employee was awarded UI benefits. After he was receiving benefits, the company saw his picture in the paper working on the sewer in Lexington. Mr. Kaufman reported this fraud to the UI agency, but nothing happened to the former employee.
Cynthia Bohn addressed three scenarios with the committee. A former employee was receiving benefits when Ms. Bohn discovered the employee was working. She reported the fraud to the UI agency and nothing happened. Ms. Bohn also discussed a good employee who had to be offered another job because of the economy and his position was being eliminated. He had to become a salesman and work weekends. He did not want to take this position. She felt that she should not have to pay UI benefits on him since she had offered him a good position. Her third scenario involved a current worker who has “gone bad.” She has poor production. She threatens Ms. Bohn that if she is let go she will get UI benefits. Ms.Bohn feels she is stuck with a bad employee because she would still get UI benefits.
Steve Bowlds stated that his business averaged about 15 employees. He had some positive dealings with the UI agency, but had noticed a shift in the agency’s attitude. Mr. Bowlds felt there was a shift towards a bias for employees. Mr. Bowlds asked for fairness in hearings and to have documentation of misconduct to be considered by the hearing officers. Mr. Ross stated that he had been told that he could not have an attorney at the UI hearing.
Secretary Joe Meyer addressed the committee and attempted to address the issues brought by the employers. Secretary Meyer discussed misconduct of an employee and how it can disqualify an individual from receiving unemployment benefits. In many instances, the disqualification of an individual depends on how the evidence is presented. It is decided on a case by case basis. In many instances, employers do not have sufficient evidence to prove misconduct of an employee.
Secretary Meyer indicated the statute requires that the employer has the burden of proving misconduct and the agency is required to follow the standard spelled out by statute. While the appeals process is informal, the burden of proof must be met by the employer and many fail to meet that burden. There is a current case before the Supreme Court of Kentucky that appeals a Court of Appeals ruling in which the court ruled a person with excessive tardiness is not guilty of misconduct.
Secretary Meyer said that employers have an absolute right to the assistance of attorneys at any time during the UI appeals process. The agency has expanded the referee staff and cut the delay of cases from six to eight weeks to three to four weeks. Secretary Meyer also said that remanded cases get priority.
In July, a pilot project was started to eliminate elements of surprise for the employer and employee by requiring the exchange of information prior to hearings. Secretary Meyer discussed a training program put into place for employers which includes two mock hearings. Secretary Meyer indicated that many employers have a perception of bias in favor of the employee but in reality the employers won 70 percent of the UI cases in 2011.
Secretary Meyer said the standard in 1982 was changed to eliminate the requirement of intentional behavior in response to Senator Kerr. Senator Kerr asked if the statute could be adjusted to deal with people who are doing very little work. Secretary Meyer said he would have to give that issue some thought and look at how the rulings have been. Secretary Meyer mentioned the trainings for employers offered by UI in response to Senator Kerr. Senator Stein asked Mr. Kaufman if he had prosecuted the employee for theft and Mr. Kaufman replied no. Mr. Kaufman could not prove the employee had stolen anything. Secretary Meyer indicated that unsatisfactory work by itself does not constitute misconduct in response to Senator Westwood. Secretary Meyer told Representative Stewart that a legislator is allowed to sit in with an employee or an employer at a referee hearing.
Employee Misclassification in the Construction Industry in Kentucky
Larry Roberts, Director of the Kentucky State Building and Construction Trades Council (KSBCTC), addressed the committee on the issue of misclassification in the construction industry. Mr. Roberts stated that in the spring of 2005, a study in Massachusetts looked at the economic impact of misclassification in the construction industry and reported one in seven employers was misclassifying employees. In 2007, the governmental accounting office estimated that there were 10 million independent contractors in the United States, reflecting an increase of 2 million over a six year period. In a case of true misclassification, an individual is not an independent contractor but is an employee under the direction of an employer, who completes work with the employer’s tools, maintains no investment, and no chance for profit or loss on the job. Mr. Roberts said that misclassification does not occur only in residential construction, but in industrial, commercial, public works construction, and projects of all sizes.
Mr. Roberts said during the 2008 General Assembly, a gentleman described the business model of a North Carolina company operating in Kentucky, Precision Walls. This testimony was presented before the House Committee on Labor and Industry. The employees of Precision Walls were designated as independent contractors who conducted the construction. The independent contractors received cash for their work. In 2009, Precision Walls was the subcontractor on the Kentucky Horse Park Indoor Arena.
Mr. Roberts presented a video which described two particular cases of workplace fraud. Workplace fraud occurs when employers misclassify their employees as independent contractors by providing them with a 1099 form instead of a W-2 for employees, or by paying with cash in lieu of withholding taxes. A recent study of Kentucky’s construction industry found that approximately 25 percent of construction contractors engage of some form of workplace fraud. Ultimately, these contractors bypass paying state and local payroll taxes and avoid paying workers’ compensation and unemployment insurance. In 2010, out-of-state contractors performed the cleanup after significant flooding occurred in Louisville. The Kentucky Labor Cabinet recovered over $800,000 in unpaid wages for primarily immigrant workers who were treated as independent contractors. The general contractor in this case was forced to pay the employees through a payroll system which resulted in over $100,000 in taxes being remitted to the local state and federal government. The company that was awarded the bid to complete all of the drywall work for the Kentucky Horse Park project in 2009 illegally paid its employees in cash. Local contractors could not compete for the bid because this company was conducting workplace fraud. When construction workers are misclassified, it undermines Kentucky’s ability to have a sustainable workforce.
Mr. Roberts said contributing factors to the issue of misclassification include the unfair competition in construction contracting, which may result in willingness to take the risk to violate the law, and the high rate of unemployment in Kentucky and the Nation resulting in more legal workers and immigrant workers who may be willing to be classified as independent contractors and paid in cash regardless of the circumstances.
Michael Kelsay, Ph.D., and James Sturgeon, Ph.D., of the Department of Economics at the University of Missouri - Kansas City compiled a study based upon data retrieved from the audits of unemployment insurance agencies as required by the United States Department of Labor. For the years 2007 through 2010, the Kentucky unemployment insurance audits found on average 26.4 percent of construction employers misclassified workers. This translates to approximately 2,800 construction employers in Kentucky. In 2007, the study identified 1,488 misclassified workers. In 2010, at an increase of 113 percent, 3,010 misclassified workers were identified for all industries. Of the five sectors audited, Health Care and Social Assistance, Retail Trade, Professional Scientific and Technical Services, Other Services and Construction, the number of misclassified workers is substantially higher in the Construction sector than in other industries.
Mr. Roberts stated that the studies by Dr. Kelsay and Dr. Sturgeon show that Kentucky suffered a minimum loss of over $6 million per year as a result of income tax that was not paid, a loss of $5 million in workers compensation premiums and $1.75 million in unemployment insurance, which is based only on those employers who issued 1099 forms to their misclassified independent contractors. Recommendations from the study include, increase the targeted audits on problem employers, develop meaningful penalties, encourage collaboration between labor, revenue, workers’ compensation and unemployment insurance entities, and expand educational outreach amongst employers and employees. Mr. Roberts said on behalf of Dr. Michael Kelsay, he would be available to further discuss the studies before the committee.
In response to questions from Representative Kerr, Mr. Roberts said administrative changes may be effective in order to increase the number of required audits conducted and in encouraging collaboration between entities. Certain confidentiality issues or restrictions may become apparent in the sharing of information. Classification under common law applies to unemployment insurance, workers’ claims, and revenue. The statutes and regulations of employment law are within KRS Chapter 337 which the Labor Cabinet enforces. Legislation that did not pass through both chambers in 2008 may be revised to evaluate penalties incurred by employers who misclassify.
In response to questions from Senator Rhoads, Mr. Roberts said there is often no record of an employee when the person has been paid in cash or a 1099 form has not been filed and therefore there is no payroll to audit for workers’ compensation purposes. Worker compensation carriers may be liable for premiums not paid on employees who have sustained an injury on the job and are ultimately determined to be employees, not independent contractors.
In response to questions from Representative Pullin, Mr. Roberts said in the workplace fraud case of Precision Walls, $300,000 in wages was recouped through litigation, the company agreed to a six month debarment and would not to subcontract for a year,. Precision Walls is no longer operating in Kentucky, but may be considered for jobs in the future. By the model procurement code, companies up for bids are required to divulge information and the owner is supposed to determine the legitimacy of the subcontractor.
There being no further business the meeting adjourned.