The Louisiana Capitol Building, April 8, 2021. (Wes Muller/Louisiana Illuminator).
The Louisiana House unanimously passed a bill Monday meant to discourage employers from misclassifying workers as independent contractors and, thus, depriving the state of taxes and the misclassified workers of protections that include overtime pay and workers compensation.
Sponsored by Rep. Neil Riser, R-Columbia, House Bill 705 proposes a $500 first-offense penalty for each individual misclassified, but that fee shall be waived if the employer becomes compliant within 60 days of the citation. The penalty doubles to $1,000 for a second offense and grows further to $2,500 for subsequent offenses.
“I think this is one area of the law that for too many years has been too murky,” Rep. Robby Carter (D-Amite) said.
First-offense fines average at about $5,000 across the country, and even if there were no first-offense waiver, Louisiana’s fine would be 10 times lower. Even fines for repeated offenses would only be half-as-much as the first offense in other places. Riser initially proposed a $5,000 first-offense fine, bringing Louisiana in line with other states, but he amended the bill to incorporate the much lower penalties as part of a compromise with two powerful lobby groups: the Louisiana Association of Business and Industry and the American Federation of Labor and Congress of Industrial Organizations.
Employers do not pay any taxes on workers whom they classify as independent contractors. Independent contractors are generally defined as business owners or sole proprietors who perform work for other businesses under a contract that is usually temporary. Independent contractors generally set their own hours and wages by bidding for jobs and are free to perform work for other companies and employers, among other factors that vary on a case-by-case basis.
Additionally, Riser’s bill proposes a new 12-point test to define an independent contractor, which LABI first pitched to Louisiana’s Misclassification of Employees Task Force, which was established last year by the Department of Revenue to research solutions for the misclassification problem that has long plagued the state. The task force rejected LABI’s proposed definition and planned to request more time to work on it. Among the task force’s concerns with the 12-point test was its divergence from the test used by the U.S. Department of Labor.
The 12 points are as follows:
- “The individual or entity operates an independent business that provides services for or in connection with the contracting party.”
- “The individual or entity represents the provided services as self-employment available to others, including through the use of a platform application to obtain work opportunities or as a lead generation service.”
- “The individual or entity accepts responsibility for all tax liability associated with payments received from or through the contracting party.”
- “The individual or entity is responsible for obtaining and maintaining any required registration, licenses, or other authorization necessary for the legal performance of the services rendered by him as the contractor.”
- “The individual or entity is not insured under the contracting party’s health insurance or workers’ compensation insurance coverage and is not covered for unemployment insurance benefits.”
- “The individual or entity has the right to accept or decline requests for services by or through the contracting party and is able to perform services for or through other parties or can accept work from and perform work for other businesses and individuals besides the contracting party even if the individual voluntarily chooses not to exercise this right or is temporarily restricted from doing so.”
- “The contracting party does not direct or oversee the performance, methods, or processes the individual or entity uses to perform services.”
- “The contracting party has the right to impose quality standards or a deadline for completion of services performed, or both, but the individual or entity determines the days worked and the time periods of work.”
- “The individual or entity furnishes the major tools or items of equipment needed to perform the work.”
- “The individual or entity is paid a fixed or contract rate for the work performed and the contracting party does not pay the individual or entity a salary or wages based on an hourly rate.”
- “The individual or entity is responsible for the majority of expenses incurred in performing the services, unless the expenses are reimbursed under an express provision of a written contract between the parties or the expenses reimbursed are commonly reimbursed under industry practice.”
- “The individual or entity can use assistants as deemed proper for the performance of the work and is directly responsible for supervision and compensation.”
Under Riser’s legislation, a worker would be classified as an independent contractor by passing 7 of the 12 points. Going by that proposed definition, independent contractors could include workers who can’t set their own hours, aren’t allowed to work for other businesses and are directly managed or supervised by the contracting party, among others.
Louisiana’s current law already gives a warning to businesses caught for the first time misclassifying workers. Legislative Auditor Darryl Purpera, who recently retired, had described that leniency as a primary cause of the state’s worker misclassification problem. In 2019, Purpera’s office issued a report on more than 3,000 audits it had 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.
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, Social Security, unemployment insurance and workers compensation. When businesses illegally misclassify employees as independent contractors, it denies the worker those protections and cheats the government out of tax revenue, which can lead to higher taxes on businesses that do follow the law.
Rep. Barry Ivey, R-Central, proposed an amendment on the House floor that would have removed the first-offense waiver from Riser’s bill and fined offenders $500. Although Riser said he was willing to accept it, Rep. Larry Frieman (R-Abita Springs) objected to the amendment, forcing a vote that overwhelmingly rejected the change.
For years lawmakers have introduced bills similar to Riser’s that attempt to fix the misclassification problem but none have succeeded. Sen. Jay Luneau (D-Alexandria) has a nearly identical bill working its way through the legislature.
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