The 2nd meeting of the Interim Joint Committee on Licensing and Occupations was held on Friday, August 22, 2008, at 10:00 AM, at the Jefferson Community and Technical College Tech Campus, 800 West Chestnut Street, Louisville KY. Senator Gary Tapp, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Gary Tapp, Co-Chair; Representative Joni L. Jenkins, Co-Chair; Senators Tom Buford, Julian M. Carroll, Perry B. Clark, Julie Denton, Carroll Gibson, Denise Harper Angel, Bob Leeper, and Dan Seum; Representatives Tom Burch, Larry Clark, Ron Crimm, Tim Firkins, Dennis Horlander, Dennis Keene, Adam Koenig, Reginald Meeks, Charles Miller, Tim Moore, David Osborne, Carl Rollins II, Sal Santoro, and Ron Weston.
Guests: Bob Vance, Secretary, Public Protection Cabinet; Lisa Underwood, Executive Director, Patricia J. Cooksey, Policy Advisor, Kentucky Horse Racing Commission; Larry Roberts, State Director, Kentucky State Building and Construction Trades Council; Tom Underwood, Fire Sprinklers Contractors Association, Inc.; Robert Weiss, Home Builders Association of Kentucky; and Richard Vincent, Associated General Contractors of Kentucky.
LRC Staff: Vida Murray, Bryce Amburgey, Tom Hewlett, and Susan Cunningham.
Senator Tapp called the meeting to order. Representative Jenkins welcomed members to Louisville and the Jefferson Community and Technical College Tech Campus. She introduced Dr. Anthony Newberry, President and Bob Silliman, Tech Campus Dean. Mr. Silliman said that the Tech campus offers a variety of classes including nursing, physical therapy, real estate, industrial maintenance, industrial electricity, plumbing, heating and air conditioning as well as an FAA certified aviation class held at Shawnee High School. Dr. Newberry told committee members that legislation ten years ago brought two college systems together; expanding opportunities and making access to higher education in Kentucky stronger. He said that there are five campus locations for Jefferson Community and Technical College including new campuses in Shelby and Carroll County. He added that a new allied health and nursing building was under construction. Dr. Newberry said this semester’s enrollment was a record high with 15,500 students.
Senator Tapp thanked the college officials, then asked for a motion to adopt the minutes from the June 13, 2008 meeting. There was a motion and a second, and the minutes were adopted by voice vote.
The first item on the agenda was a review of Executive Reorganization Order 2008-668 relating to the establishment of the Kentucky Horse Racing Commission (KHRC). Bob Vance, Secretary of the Public Protection Cabinet, told members the order was filed on July 16, 2008. The executive order changed the name and the structure of the Kentucky Horse Racing Authority to the Kentucky Horse Racing Commission. He said on July 24, 2008, the Governor signed an executive order creating the Governor’s Task Force on the Future of Horse Racing. The new commission has one minor structural change with the creation of two additional divisions; the Division of Breeders Incentive, and the Division of Veterinary Services. Mr. Vance said the governor was concerned that Kentucky’s trade mark industry was not doing enough to maintain its integrity, that safety issues were being ignored, and that medication regulations were being violated. He said that the reorganization and the new commission sends a message to the public that the administration is serious about the integrity and viability of the industry in the future. Mr. Vance said the new commission is focused on promoting safety and the integrity of Kentucky’s racing industry. Mr. Vance reported that the commission’s budget projection for fiscal year 2009 is a $619,000 deficit.
Mr. Vance told members that the commission has met with all parties involved in running race tracks in Kentucky to gather their input on how best to continue the unfunded mandate to inspect all tracks. The consensus was to raise license fees for owners, jockeys, trainers, and veterinarians from $100.00 to $150.00 per year. He said this is a temporary raise that more than likely will change after the task force makes recommendations. Mr. Vance said there have also been discussions with the tracks, both Standardbred and Thoroughbred. He said all are in agreement that the track fee will be $500.00 per day for small tracks, while they are in operation; and $2,600 per day for the two large tracks, Churchill Downs and Keeneland, when they are in operation. Mr. Vance said everyone in the industry is cooperating in an effort improve racing in Kentucky.
Senator Tapp asked for a motion to adopt Executive Order 2008-668. Representative Clark made the motion, seconded by Senator Carroll and the order was adopted by voice vote.
Senator Gibson asked if the salary for the Executive Director had been increased when the new commission was established. Lisa Underwood responded that she had the same salary, adding that the commissioners’ salaries were also not increased. Representative Meeks asked how the proposed increase in license fees compared with other states. Mr. Vance said the licensing fees were a little on the high side. Representative Meeks also asked what the commission’s priorities are and if progress will be measurable within a year. Mr. Vance said the task force would look at increasing purses and medication restriction and regulation. Mr. Vance stated that the task force was to report to the Governor on or before December 1, 2008. Representative Burch asked if the commission members had changed under the reorganization. Lisa Underwood said that the present commission is made up of owners, breeders, trainers and a veterinarian.
Senator Denton asked how the full-time positions could increase when the operating expenses go down and there is a budget deficit. Mr. Vance responded that the audit of the commission showed the office understaffed. Also, the new regulations mandate additional enforcement personnel and a Supervisor of Pari-Mutuel Betting.
Lisa Underwood, Executive Director of the KHRC, said the commission had been audited by the Auditor of Public Accounts several years ago showing that the commission was understaffed and underfunded. Ms. Underwood said that the audit suggested that the commission perform more background checks. The licensing team conducts background checks through Racing Commissioners International (RCI) on every licensee who comes through the system. She said fingerprinting licensees will start in 2009 with one class of licensees, trainers, as a pilot project. Ms. Underwood said the auditor also recommended monitoring the tote system, citing independent assurance of mutuel wagers and race track tote operations. She said the commission will begin interviews for a supervisor of pari-mutuel betting in the near future. She said it is her hope that the task force will recommend a method, or system, to allow the commission to monitor the tote system.
Ms. Underwood said protecting the integrity of the sport requires the public to have confidence that the races are being run on an even playing field. She said Dr. Mary Scollay was hired as the commission’s first Equine Medical Director. Dr. Scollay will be working with the task force to make recommendations for industry needs and funding for testing, research, and laboratory facilities in Kentucky.
Ms. Underwood said that safety concerns have been, and will continue to be, a priority. As an example she said in that last few years the commission has upgraded drug regulations to eliminate several race day medications, and promulgated and enforced safety vest and helmet rules. Dr. Scollay is investigating a collaborative effort with the University of Kentucky regarding the necropsy program, and is also the program coordinator for the Jockey Club Equine Injury data base. Ms. Underwood said all of Kentucky’s thoroughbred tracks participate in that data base since its inception last year. It is the hope of the commission that collecting information from the two programs will help identify causes of injury, enabling the commission to provide solutions to make racing a safer sport. Ms. Underwood said that in May the commission voted to form a Safety and Welfare Committee, and in July that committee proposed a rule relating to shoes. This proposal is going through the administrative regulation process and will ban toe grabs on the front shoes. Currently, the committee is working on a regulation to ban riding crops. Ms. Underwood said that new initiatives are posted on the KHRA’s website. Ms. Underwood said Dr. Jerry Yon has been appointed chair of the Equine Drug Research Council. She said that the council has made a recommendation to the commission on an amendment to the medication regulations for Thoroughbreds and Standardbreds, providing for a ban on anabolic steroids. She said the Governor considers this ban an emergency and the commission will request that the Governor sign an emergency regulation.
Ms. Underwood said there was great concern that the federal government would take over the regulation of racing. She said Kentucky could lose control over its signature industry and if the federal government takes over there could be unfunded mandates imposed. She said Kentuckian’s are in the best position to know appropriate regulations for Kentucky horse racing.
Ms. Underwood clarified the commission’s budget information by saying the money in the Breeder Incentive Fund is not the commission’s money. She said commission is a “flow through” for the money that belongs to the breeders. She told the committee that, to date, there are 457 more mares registered for the fund than for all of 2007. The dollar amount awarded to breeders in 2007 was $15.4 million and that an average award check to a breeder was $1,780. Ms. Underwood said the commission has hired a horse identifier who checks farms to ensure that brood mares registered for the fund money are staying in Kentucky during the entire gestation period.
Senator Tapp asked if it was possible to cover all farms in a year’s time, and if the checks were random. Ms. Underwood said that it is not possible to cover all the farms in a year. She said that the checks were random and there have been no violations found.
P. J. Cooksey told committee members that since the late 1990’s the Standardbred industry has been on a downward spiral; however, since the inception of the Breeder’s Incentive Fund the industry is more buoyant. She said that in 2006 there were only 23 Standardbred stallions standing in Kentucky, but since the inception of the incentive fund, in 2007, there are 38 stallions standing in Kentucky. The Kentucky Sire Stakes purses are only for Kentucky bred and foaled Standardbred horses. Ms. Cooksey said that in 2006 the purses were $1.7 million, in 2008 the purses are $2.8 million. She said that on August 31, 2008, the Red Mile will host the second annual “Unbridled Evening of Champions” awarding $2.4 million in purse money. Ms. Cooksey said the Standardbred industry is grateful for the $3 million through the incentive fund, but other states are advertising purse awards totaling upward to $15 million.
Ms. Cooksey told committee members that the non-race breeders incentive fund is the only one of its kind in the United States. She said that the first year there were only nine applications approved for the fund money, and the distribution for that year was $1,131,706. She said the Kentucky Quarter Horse Association received 32.6 percent of that money. Ms. Cooksey said there have been requests from other non-race breeds who want to be involved with the incentive fund. She said the next application is due in November of this year. The non-race breed application is taken every three years.
Representative Clark said he hoped that Kentucky will be a leader and not allow the federal government to set standards. He said Kentucky should set standards for national race day medication. Representative Meeks asked, what is the source of funds from the other states. Ms. Cooksey cited an article from HarnessRacing.com website saying; “based on the amount of money flowing into the Pennsylvania Sire Stakes account from its several sources it is possible that the program in 2009 will distribute $12 million in purses, up from $10 million last year….The money going to Sire Stakes from the slot machines totaled $4 million after six months this year,…..it would seem that $8 million is a reasonable figure to expect from the slot funding stream…..Add to that the $2.5 million that should be coming from taxes on the pari-mutuel wagering…” Representative Meeks asked further if it was the professional opinion of the panelist that expanded gaming could provide a significant income stream for horse racing in Kentucky. Secretary Vance and Ms. Underwood were both in agreement that expanded gaming would provide much needed funding. Ms. Underwood further stated that this is an issue that the Governor’s task force would be reviewing. She said, as an example, if Turfway Park was racing, the task force would look at who was racing in other states at that time of year, and what the purse structure of those race tracks would be.
Next on the agenda, was Larry Roberts, State Director for Kentucky State Building and Construction Trades Council spoke representing 15 international unions in Kentucky. Mr. Roberts said there are three groups that are impacted negatively because of the misclassification of employees. The most important group is the Commonwealth of Kentucky and taxpayers because of lost tax revenue. He said misclassifying employees as independent contractors also creates an unlevel playing field for honest contractors who cannot compete with contractors who misclassify their workers and avoid tax obligations. The third group is workers who are being taken advantage of and denied protection that exists under employment law. This practice occurs in every sector of industry including residential, commercial, industrial and public works construction. Employee misclassification is a practice used intentionally by contractors to reduce their tax burden and allows contractors to avoid certain tax obligations including; paying unemployment taxes, the contractors share of social security and Medicaid, and withholding the worker’s income tax.
Mr. Roberts said the General Accounting Office reported that the underpayment of Social Security Tax, Unemployment Insurance Tax, and income tax amounted to an estimated $2.72 billion tax loss nationally in 2006. He said that recent studies show misclassification costs individual states millions of dollars in unemployment insurance tax, income tax and workers’ compensation contributions. Mr. Roberts said that employee misclassification is a serious and growing problem to workers and law abiding contractors and is a method some contractors are using in an increasing “underground economy,” where thousands of workers, including illegal immigrants, are paid in cash or by other methods and their income is untaxed. This hides the contractor’s real tax liability. The contractor/employer who misclassifies a worker as an independent contractor instead of as an employee saves up to 30% in associated payroll costs. Mr. Roberts said that, by definition, an employee is directed by the contractor, who determines what needs to be done as well as controlling how it is completed. An independent contractor; however, is in business for himself and retains the right to control how they will get the work done. He said an independent contractor performs a specialized service, not central to the overall project; provides their own tools; hires their own employees; and reports income to the IRS. The IRS estimates that noncompliance with tax payments and reporting laws is higher among individuals without third party reporting. The Unemployment Insurance Trust Fund also loses money through non-payment. This money would be used to help displaced or unemployed workers to find employment if it was properly submitted.
Mr. Roberts said that the employee who is misclassified is left unprotected from workers guarantees such as minimum wage requirements, overtime pay, safety and health standards, medical leave, anti-discrimination laws and denied access to unemployment insurance and workers’ compensation. He said that in the construction industry, where misclassification is the most prevalent, contractors who cheat are able to underbid honest contractors, giving the devious contractors an unmerited advantage. Reliable contractors find it hard to compete and are consistently underbid by contractors who hire illegal immigrants and/or misclassify their employees, making it possible to propose a lower bid for a project.
Mr. Roberts said that misclassification of employees has received increased attention recently both at the state and national level. The IRS introduced the “Taxpayer Responsibility, Accountability, and Consistency Act of 2008,” in April to close a loophole employers use to misclassify workers. He said a number of states have taken legislative action to address misclassifications including civil and criminal penalties, and uniform definitions of employee and reporting requirements across state agencies. Mr. Roberts stated that currently Kentucky does not require the agencies that enforce wage and hour laws, workers’ compensation, unemployment insurance, or tax laws to share information or coordinate enforcement against contractors found to misclassify workers. He said that minimal or non-existent penalties and costs associated with getting caught are not enough to deter contractors who cheat.
Senator Tapp asked if the issue was that agencies are not sharing reporting information. Mr. Roberts said that was a large part of the problem; however, he felt that additional penalties should be associated with misclassification. Representative Miller asked if there was any way to know how many people where not paying their taxes. Mr. Roberts said he was not aware of a way to determine that. Representative Koenig asked if there was anything in statute that prohibited agencies from sharing information. Mr. Roberts said there was no law to prevent agencies from sharing information. Representative Koenig said he felt that there were penalties in place and said he was reluctant to make a new law if the old one is not being used. Senator Tapp said staff would gather information on current penalties. Representative Burch asked if there were figures on what the violations were costing tax payers. Mr. Roberts said Kentucky had not done a study on the cost. Senator Harper-Angel asked if there was support from the non-union contractors community. Mr. Roberts said he could not speak for them; however, he felt that the majority of that community was concerned. Representative Keene said as a small business man he did not receive cash.
Mr. Roberts said that the contractors who do business with the Commonwealth should be held to higher accountability. Representative Rollins asked what responsibility the contractor had to ensure that their sub-contractor carried workers’ compensation insurance. Mr. Roberts said if there was an injury the general contractor typically carried a policy to cover the harm. Representative Crimm said if a sub-contractor is not paying worker compensation or does not have general liability insurance it becomes the responsibility of the contractor. Senator Seum said he understood the problem. However, he thought a way to eliminate part of the problem was to simplify the overly burdensome rules by imposing a flat tax. He added that as a former small business owner he was not surprised that there was an underground economy because of the number of rules and regulations imposed on small businesses.
Next on the agenda Bob Weiss, Home Builders Association of Kentucky; Richard Vincent, Executive Vice-President of Associated General Contractors of Kentucky; and Tom Underwood, Kentucky Fire Sprinklers Association spoke, to the committee regarding their concerns with the misclassification of employees.
Richard Vincent told committee members that Associated General Contractors of Kentucky is a commercial association comprised of approximately 700 general contractors, sub-contractors and industry associates. He said that the issue of intentional misclassification of employees as independent contractors is a concern to the members of his association. He said unscrupulous contractors have abused the sub-contractor definition to create unfair advantages. Mr. Vincent said the industry has no room for companies or individuals who defy the law for profit. In an industry where margins average less than two percent and labors costs are 40 percent of the contract, these instances of improper classification of employees cost contractors, without a doubt. He said it was important to note that the majority of contractors are ethical, law abiding, good people.
Bob Weiss said the Home Builders Association of Kentucky did believe the misclassification was a problem in more ways than one. He said that the housing recession in the 1980’s changed his industry vastly. He said builders downsized and began to operate with other suppliers, plumbers, and others who are independent contractors. He said on the reverse side of a misclassification is an independent contractor who gets hired until there is no work or someone gets hurt; and then wants to become an employee to use the contractors workers’ compensation or unemployment insurance. Mr. Weiss said keeping the definition of the classification of an independent contractor as simple as possible would be important.
Tom Underwood said that KRS 141.150, a statute that was still in effect but was written in 1944, specifically empowers the Revenue Cabinet to enforce this type of situation and requires employers to report the wages they have paid to both sub-contractors and employees. He said what is not in KRS chapter 141 is a specific definition of who is an employee and who is a sub-contractor. He said it is very difficult for small business owners to comply with the law without a specific definition. He said with the current state of the economy the only area of growth in employment is the small business sector. In Kentucky, small businesses provide over 51 percent of all jobs within the Commonwealth. He said 83,000 employers with fewer than 20 employees and another 150,000 sole proprietors who work individually. He said there should be a fair, easy to understand, direct definition so that employees are covered and do not hinder new small businesses from being developed. Additionally, the current statutes do not have a provision prohibiting one agency providing information to another with possibly the exception of the OSHA Educational Program. Mr. Underwood said that it was his belief that if a sales tax auditor had to trudge through a puddle of PCB’s as they went into a business they would call the Environmental Protection Cabinet because if there is a violation, agencies have a duty to inform other agencies. He said that without a definitive resolution as to who is the independent contractor and who is the worker the problem will go unsolved.
Representative Moore said he did not want to add to the burden of honest contractors by adding new laws making it hard to comply with the law while still making a profit. Representative Koenig asked what the opinion was on enforcement. Bob Weiss said if you are not paying taxes the enforcement should go through the Finance and Administration Cabinet. Representative Santoro said the definition should be simple, black and white, who is an employee and who is not. Bob Weiss said, should a contractor hire sub-contractors who do not have workers’ compensation on their employees and one of those employees get hurt, it goes back on the contractors workers’ compensation and the ability to keep their policy is in jeopardy. He said this is the incentive for the contractor to have all the proper insurance. Representative Burch said small business people know right from wrong. Tom Underwood said that is why they were asking for a clear definition so the small business person knows how best to comply with the law without stifling the creation of new small businesses. He added that the Small Business Caucus met and the consensus was that this issue did not affect just the construction industry but all employers in keeping a level playing field. He said all employers and employees need a clear definition of how the law is interpreted. Senator Seum asked if an individual working for himself subcontracts to do a job, is he required to have workman’s compensation. Tom Underwood said under current law he would be considered a sole proprietor and would file a declaration. Senator Harper-Angel asked if everyone who testified would come together to work to develop a simple definition of an independent employee as well as ideas on how to enforce the definition. Senator Tapp responded that he was in the process of forming that group. Senator Buford said that even if the sole proprietor files a waiver, the contractor and the property owner could be sued for the injury of that individual, and the negligence claim would be hard to disprove in a court of law.
Senator Tapp recognized Vida Murray on the occasion of her retirement. Representative Jenkins read and presented Ms. Murray with a resolution commending her dedication to the Legislative Research Commission.
There being no further business to come before the committee the meeting was adjourned at 11:50 a.m.