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Debate Over Independent Contractors Gets Testy

April 18, 2023

Article courtesy MIRS News for SBAM’s Lansing Watchdog e-newsletter

Businesses would be fined for classifying their workers as “independent contractors” as a way of getting around paying benefits under a piece of a 16-bill package addressing so-called “payroll fraud” and “wage theft” under legislation hotly debated during Thursday’s House Labor Committee meeting.

The Democratic-led package was added to the Labor Committee’s agenda Wednesday afternoon after the bills were introduced earlier that day, according to the Michigan Legislature’s records.

During Thursday morning committee testimony, Rep. Tom Kunse (R-Clare) said he was also only informed about the additions to the agenda on Wednesday afternoon around 3 p.m.

However, when asked by Kunse, President of the Michigan Regional Council of Carpenters and Millwrights, Tom Lutz, who testified in favor of the package, said he was given advance notice of the hearing three days before.

Opponents of the bill, which included the Michigan Chamber of Commerce and National Federation of Independent Business, shared complaints that they weren’t given similar notice to analyze the bills and reach out for member feedback on their content.

A flagship bill in the package is Labor Chair Jim Haadsma (D-Battle Creek)’s HB 4390, which defines independent contractors as those who operate outside the usual course of the payer’s business.

The bill also prohibits the misclassification of employees with a penalty of 100% of the annual wages and fringe benefits due to the employee, along with the possibility of damages up to three times what were due to the employee if the violation is flagrant or repeated.

The 100% penalty is a marked increase from the 10% currently in statute. The Department of Labor and Economic Opportunity could also assess a civil fine of up to $10,000 against an employer under the bill, with 50% of fines and damages going back to the employee.

The other half of the penalty would be placed into the newly created Wages and Fringe Benefits Fund, which would then be used to fund further enforcement.

Several Michigan contractors testified in favor of the legislation, with the belief that the package would allow above-board contractors to remain competitive.

Lutz asked committee members to imagine instances where employees aren’t paid overtime, are not made eligible for workman’s comp and undocumented workers are taken advantage of to undercut competitors.

“It’s an all-too-real nightmare,” Lutz said, “and it’s called employment fraud.”

Lutz said practices like these are rampant in the construction industry, impacting even large and public construction projects and stemming from the misclassification of employees.

For those in the construction industry, he said independent contractor is a code word for an exploited employee, who often doesn’t have another choice when it comes to employment.

Evan Howe, an estimator with Integrity Interiors, said these practices are a way to cut costs. There are certain companies that show up on bid day, and contractors know they don’t stand a chance, he said.

He said contractors are “getting killed” on projects with people who they don’t believe are playing by the rules, and “I need your help.”

“I feel handicapped because I’m honest,” he said, referencing an instance where he lost a bid on a school construction project when his competition bid a price 30% lower. Later in the summer, he had to come clean up their mess when they weren’t paying contractors, Howe said.

But not everyone present said the bills would only affect bad actors and those purposely misclassifying employees.

Wendy Block, vice president of business advocacy and member engagement with the Michigan Chamber, said the proposed definition for an independent contractor could restrict the ability for anyone to use an independent contractor, or for an individual to become one.

She said there are thousands of people classified as independent contractors in Michigan, but the bill has no exemption for different types of workers outside the construction industry and “goes much further than anything we’ve seen in another state.”

That includes California, which Block said enacted similar legislation that was soon followed by litigation. However, even in California, there were exemptions for independent contractors like grant writers, marketing agents, travel agents, freelance writers and editors and real estate agents, among others, she said.

Block also expressed concern about Rep. Alabas A. Farhat (D-Dearborn)’s HB 4406 and Rep. Karen Whitsett (D-Detroit)’s HB 4401, which would increase wage disclosure requirements for employers between “similarly situated employees.”

Farhat’s bill would require employers to disclose wage information upon request for employees within the same job classification or with duties comparable in skill, effort, responsibility or working conditions. His bill would also prohibit discrimination against an employee based on their request for disclosure.

Whitsett’s bill would provide a $10,000, two-year felony for employers who violate the provision multiple times.

Block said that though wage transparency is never a bad thing on its face, it’s important to remember that people are making different salaries for many different reasons, including education and experience, which employers are then going to have to explain.

She added that the felony penalty language is alarming due to its severity, and could result in someone making an honest mistake and ending up in jail if they weren’t promptly notified of the change.

Rep. Joey Andrews (D-St. Joseph) made a comment that factors like experience and education would be digestible for employees, but other things, like gender, race and sexuality, are the driving factors behind the legislation.

The conversation became heated when Andrews said he’s curious as to why there’s a race to inform people who are taking advantage of the law and help them avoid getting caught, to which Block responded that a change in the law requires notifying constituents and that she didn’t appreciate words being put in her mouth.

Andrews responded, “I understand that it will be tough on employers who are currently exploiting workers to figure out how to pay them fairly,” which earned a complaint from Kunse to Haadsma.

The dispute stemmed from the disagreement that the bill would affect all independent contractors, and not just bad actors, but both Block and Amanda Fisher of the National Federation of Independent Business agreed that opponents would appreciate the opportunity to discourse further and work on the bill.

Fisher added that when it comes to wage disclosure, some employees might not want their own information disclosed to their peers.

She added that an additional concern is the burden on employers to prove their innocence, which she said goes against principles of Michigan’s justice system.

“We’re not talking about bad actors, we’re talking about completely changing the system,” she said.

The bill package would address the issue of misclassification with Rep. Brenda Carter (D-Pontiac)’s HB 4391.

Carter’s bill would amend the Income Tax Act’s instruction booklet to include a page explaining the rules surrounding classifying an individual as an employee versus an independent contractor, along with information about reporting payroll fraud. The bill would also require a notice to be sent to payees explaining those rules.

Rep. Joey Andrews (D-St. Joseph)’s HB 4397 would create an office of the state employee ombudsman to investigate public employee claims, while Rep. Kimberly Edwards (D-Eastpointe)’s HB 4396 and Rep. Angela Witwer (D-Lansing)’s HB 4392 would protect independent contractors and employees who report a violation to the ombudsman.

Rep. Jenn Hill (D-Marquette)’s HB 4394 would prohibit the disclosure of the identity of an employee filing a complaint if requested by the employee, while Rep. Kelly Breen (D-Novi)’s HB 4395 would provide the same provision prohibiting a commissioner from disclosing an employee’s identity.

Rep. Regina Weiss (D-Oak Park)’s HB 4402, Rep. Will Snyder (D-Muskegon)’s HB 4403 and Rep. Penelope Tsernoglou (D-East Lansing)’s HB 4404 all deal with penalties for employers who violate wage and fringe benefit payments, while Rep. Jasper R. Martus (D-Flushing)’s HB 4398 would create a false claims act for those who file false labor claims, with a civil penalty of at least $6,000 and not more than $12,000, plus three times the amount of all damages, that the state or local government obtains.

Rep. Amos O’Neal (D-Saginaw)’s HB 4393 would create a supplemental appropriation to fund an Attorney General’s payroll fraud division, Rep. Denise Mentzer (D-Mount Clemens)’s HB 4399 bill would prohibit employers from forcing noncompete agreements under some conditions and Rep. Jaime Churches (D-Wyandotte)’ HB 4405 would revise the notice period for wage deductions related to garnishment.

The bills heard committee testimony on the same day as the Michigan Regional Council of Carpenters and Millwrights hosted a payroll fraud day of action, an annual event to bring attention to the issue of payroll fraud in Michigan and nationwide.

Members took to the Capitol lawn to educate members of the public and legislature, and a rolling billboard circled the Capitol.

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