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About three years ago, labor union organizer Buzz Malone stopped by a construction site in Ankeny and gave his card to five young workers on a scaffold who were laying a brick facade for a strip mall.

A few weeks later, he received a call from one of the workers, who told him that on each payday the employer had each worker sign a note stating that they were subcontractors. Their safety training, the man told Malone, had consisted of being told, “If you fall, you’re fired before you hit the ground.”

Malone, 36, knows firsthand the perils of being directed to work as an “independent contractor.” As a teenager, he was exposed to asbestos and harmful chemicals by an employer who treated him as a subcontractor and provided no safety training or protective equipment, and by his late 20s he had irreparable lung damage.

Stories like these are why Iowa Workforce Development (IWD) is seeking more than $771,000 in new funding for fiscal 2010 to hire nine specialists dedicated to enforcing existing regulations that prohibit employers from treating workers who fit the definition of employees as independent contractors. The additional staff is needed, IWD Director Elisabeth Buck told members of a legislative appropriations subcommittee last week, because identifying misclassification requires far more time than other types of employment audits.

Not independent

In many cases, workers in Iowa are wrongfully treated as independent contractors even though there is very little that is “independent” about their employment relationship, according to Malone and others who provided testimony to a state task force studying the issue last year. Companies that misclassify their employees as independent contractors avoid paying unemployment taxes, workers’ compensation premiums and other employee benefits, leaving the workers vulnerable if injured and often owing thousands of dollars in unpaid taxes at the end of the year.

Besides depriving the state of tax revenues, misclassification is also unfair to law-abiding businesses that are being underbid by companies that have lowered their costs through the practice, Buck said.

“From my point of view, I think this is a bigger problem than I thought it would be,” said Buck, who chaired the Misclassification Task Force, which Gov. Chet Culver established by executive order last July. “It really is not a victimless crime, and that’s where my passion for it is. We’re hurting Iowa workers; we’re hurting Iowa businesses.”

Despite the state’s budget shortfall and across-the-board cuts, Buck said she believes legislators will approve the increase, which was included in Culver’s budget request.

“We believe that we will raise back for the state at least that much money,” Buck said. “We think that we will find folks who are either not paying unemployment or other taxes owed to the state.”

The task force, which also included Iowa Department of Revenue Director Mark Schuling and Labor Commissioner David Neil, recommended other enhanced enforcement activities, among them a data-sharing agreement with the Internal Revenue Service (IRS). Buck hopes to have the unit’s employees in place on July 1, and it would also begin operating a public hotline to receive tips on employers that are misclassifying workers.

Burden of proof

The U.S. Government Accountability Office (GAO) estimates that in 2005 there were 10.3 million independent contractors, or about 7.4 percent of the total employed U.S. work force. By comparison, in 1995 8.3 million workers were designated as independent contractors, or 6.7 percent of the work force.

The last comprehensive study by the federal government of worker misclassification was in 1984, when the GAO estimated that 15 percent of employers misclassified some 3.4 million workers as independent contractors. More recent studies by several states indicate that a similar percentage of employers are misclassifying workers. An Illinois study found that nearly 18 percent of more than 56,000 employers randomly audited had misclassified workers between 2001 and 2005, and estimated that on average, more than 368,000 workers were misclassified each year.

“As we look at other states, we believe it could be up to 15 percent of employers in Iowa that have at least one employee who is misclassified, and some employers will have more than one,” Buck said. “But we won’t know until we put some concerted staff time into studying this.”

Iowa’s common law definition of what constitutes an employer-employee relationship states that “services shall be deemed to be employment unless the individual is free from direction and control over the performance of those services.”

“So really it puts the burden of proof on the party that’s asserting this independent contractor status, which is good because you don’t want to have the burden of proof on the employee going into the job,” Buck said.

The state has completed an application with the IRS for a “Questionable Employment Tax Practices” (QETP) agreement, similar to pacts already in place in 33 states, that will enable the misclassification unit to sift through federal tax data from 1099 forms filed by employers who are hiring workers as independent contractors.

Buck said further investigation could determine how intertwined immigrant labor is with the misclassification issue.

“We really don’t have statistics on that right now to determine whether that’s part of the problem,” she said. “We do believe in some cases that employers are preying on either young workers or workers from other countries, or folks who are disenfranchised like ex-offenders who really don’t understand completely what it means to be a contract employee.”

Though the majority of cases about which the task force heard testimony were from the construction industry, other businesses such as package delivery and accounting firms were also alleged to be misclassifying workers. Buck said enforcement will likely be focused initially on the construction industry, “but as we make people more aware of it, we may find out it’s broader than just the construction industry.”

Malone, who is president of Laborers’ Local Union No. 566 covering 15 counties in southern Iowa, said he believes the enforcement efforts recommended by the task force should be “very effective.”

“Number one, what we always lacked was individuals we could go to about this problem, and number two, a way to coordinate the state and federal agencies to address this problem,” he said. “Before, it was kind of a gray area. Having a group of folks who can bring it all together to work with these various agencies is going to be very beneficial to these workers.”