The Louisiana Legislature ended its regular session Thursday. (Photo by Julie O’Donoghue)
The members of Louisiana’s Misclassification of Employees Task Force, who are researching employer payroll fraud, feel they will not be able to submit some proposed legislation in time for state lawmakers’ regular session beginning April 12. At Wednesday’s meeting, the members agreed with task force Chairman Luke Morris when he suggested tabling one of their three recommendations and asking for more time to continue with the task force.
Morris, who also serves as assistant secretary of the Louisiana Department of Revenue, said he would rather spend additional time on crafting an effective bill rather than proposing something that may not work. Several other members made similar statements.
“There’s just a lot of moving parts to this,” Vice Chairman Brandon Lagarde said in response. “I would appreciate more time to come up with some better regulations.”
The task force was created through a Louisiana Senate resolution passed at the end of the Louisiana Legislature’s second session in October 2020. The resolution instructed the Department of Revenue to assemble a task force of experts to investigate the problem of businesses misclassifying their workers as independent contractors instead of employees, which lets employers avoid paying several payroll taxes to the state — namely unemployment, workers compensation and income taxes .
Employers do not pay any taxes on workers whom they classify as independent contractors, who are supposed to be business owners or sole proprietors that perform work for other businesses under a contract that is usually temporary. Independent contractors set their own hours and wages by bidding for jobs and are free to perform work for other companies, among other factors that vary on a case-by-case basis.
Although independent contractors do not have taxes deducted from their paychecks, they also do not enjoy the labor law protections provided to employees, such as minimum wage, overtime pay, family leave, unemployment insurance and workers compensation. When businesses illegally misclassify employees as independent contractors, it strips the worker of those protections and cheats the government out of tax revenue, which can lead to higher taxes on businesses that do follow the law.
The Oct. 12, 2019, collapse of New Orleans’ Hard Rock Hotel, which was under construction, killed three and injured more than a dozen workers, some of whom were allegedly misclassified as independent contractors by a drywall business owner, Manuel A. Reyes, who is accused of nine separate counts of fraud that cost the state $794,000 in unpaid workers compensation taxes, according to an East Baton Rouge Parish grand jury indictment.
In 2019, the Louisiana Legislative Auditor issued a report on more than 3,000 audits it conducted on misclassified employees. That report concluded that more than 13,000 misclassified workers had cost the state $3 million in unemployment taxes and $9 million in income taxes.
The task force, which has held weekly meetings since January, has focused on finding ways to bring businesses into the system without heavy-handed enforcement and penalties. They have so far drafted two amnesty-type recommendations and are having trouble with a third draft that would redefine what an independent contractor is. The first two should be ready in time but the third may not be.
The first recommendation is a “safe harbor” provision that would protect a company in an audit situation if the company is found to have misclassified any of its workers. The employer would not owe taxes on the misclassified workers if the company timely filed all its federal tax returns and has always treated the worker as a contractor and had some reason to do so — such as if independent contractors are common in their respective industry or if the employer was following the advice of a lawyer or accountant.
The second draft proposal is a “fresh start” bill that would create a program to incentivize companies to voluntarily reclassify their workers correctly by waiving any penalties or payments that would normally be owed. A business would apply for the program and if accepted would not be liable for any past-due withholding or unemployment taxes.
However, some members had questions about the proposal that could not be immediately answered Wednesday, including what to do if a company enters the “fresh start” program and later falls back into noncompliance.
The task force plans to continue working on its proposals and have a report available for the public by next week’s meeting.
Louisiana is one of the only states that issues warnings to companies that violate employee classification laws unless it can show a record of repeated violations, at which point the state can levy a $250 fine. Last year, Rep. Mandie Landry, D-New Orleans, introduced a bill that sought to change that by allowing the Labor Department to fine businesses that fraudulently pay workers as contractors instead of as employees, however, Republican lawmakers in the House Labor and Industrial Relations Committee refused to support it.
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