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Texas House Hearing Could Signal Big Changes Ahead for Misclassification and Workers’ Comp

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In a marathon hearing held by Texas lawmakers on the issues of workers’ comp and worker misclassification, representatives from businesses and labor came together to talk about what could be done to level the playing field for ethical companies and improve the lives of middle class Texans. But, there was also significant pushback from certain business interests who would like to keep things as they are.

The House Business and Industry Committee listened to about 6 hours of testimony on both issues, which some would argue are inextricably linked. The House is holding hearings on various issues right now in preparation for the next regular legislative session, which will begin in January of 2015. The point is to help shape whatever legislation might be filed next year.

In past the past couple of legislative sessions, lawmakers were focused on the problem of misclassification in the construction industry, which led to last year’s passage of a targeted crackdown on the practice that’s been labeled “a cancer.” Worker misclassification happens when a company pretends its employees are independent subcontractors when, by law, those employees meet all of the government’s criteria for being an employee. If a company does this on purpose, the intent is to avoid payroll taxes, which puts law abiding operators at a serious economic disadvantage. The ethical contractor can be underbid by a cheater by as much as 35 to 40 percent, depending on market conditions and which industry we’re talking about.

This time around, one major difference is that not only those in construction are speaking out.

Don Dyer, an executive at Professional Janitorial Services, told lawmakers that his company operates in major cities around Texas with the exception of Dallas/Fort Worth because "You cannot do business in Dallas, Texas unless you operate illegally.” He said that his company has enjoyed great expansion as the Texas economy has grown, but there has simultaneously been a huge increase in the number of companies cheating taxpayers and undercutting ethical businesses. Calling the trend “alarming,” Dyer pointed out that misclassification is already illegal, but “because of weak enforcement mechanisms there are virtually no tangible consequences for violating the law.”

“Law abiding companies that classify their employees legally simply can’t match the prices of illegal operators and are slowly being driven out of business because they can’t bid low enough to win contracts,” Dyer said. Citing various studies, Dyer said businesses in his industry that cheat enjoy a 30 to 40 percent cost advantage.

Dyer agreed with others who have said the Affordable Care Act, whether people like the sweeping health reform law or not, will exacerbate the problem because its mandates will incentivize companies to classify more of their labor force as subcontractors instead of employees. "It is epidemic and now with the Affordable Care Act that is another burden," he said. "The situation we have now is going to explode because of the Affordable Care Act."

Construction executive Stan Marek testified about both worker misclassification and the need for mandatory workers’ comp. The latter could at the very least be required in construction, Marek said. His company Marek Brothers Systems operates in 8 cities nationally and provides coverage for its employees. He told the committee that if they don’t address workers’ comp and other underlying issues in construction, including misclassification, there won’t be a workforce in the decades to come.

“It’s a ticket to poverty,” Marek said of the construction industry as a whole. “The working man is the one we have ignored in the entire equation.”

Marek also told lawmakers that while there needs to be better enforcement of existing law, a private sector solution is emerging in Houston in the form of the Construction Career Collaborative, or C3. He said the simple concept, which is growing in popularity, is that owners of projects must demand that the general contractors and their subcontractors adhere to certain principles on their jobsites. Those include paying hourly, paying overtime, and providing safety training and craft training.

That prompted the chairman of the committee, Rep. René Oliveira, D-Brownsville to observe that government is often charged with cracking down on those that do things the wrong way – and that’s good – but, perhaps they should also consider rewarding those that are already on the right track. Companies that participate in C3, or something like it, should perhaps receive tax credits to at least partially offset their costs, Oliveira suggested. “I like that idea,” Marek said.

On workers’ comp, “We don’t have all the data yet,” Oliveira said, but there are many workers that are “naked out there” because they don’t have any sort of accident coverage. Based on testimony, Oliveira estimated about 500,000 workers across the state have no coverage of any kind. Experts in attendance at the hearing agreed with his math. That represents about 5.5 percent of workers and even though that may sound like a low percentage, Oliveira said the costs of uncompensated care for those people has to be “in the billions” of dollars.

Texas Department of Insurance Commissioner of Workers’ Compensation Rod Bordelon testified that costs are down and so are disputes and injuries. Premiums have been cut in half, he said. 81% of all employees in Texas are covered by workers’ comp, Bordelon said, and there is more participation now than there has been historically in Texas.

The AFL-CIO of Texas’ representative at the hearing, Rene Lara, said that allowing hundreds of thousands of people to go without insurance on dangerous jobsites, like construction sites, is unconscionable. “I imagine that third world countries allow this to happen,” he said. Lara suggested that perhaps the state could at the very least create some minimum standards for the insurance plans that are created as alternatives to workers’ comp.

But Rep. Dwayne Bohac, R-Houston, sounded very skeptical of making any changes that might move the state away from the voluntary system. He said any changes should be based on a data-driven argument and he felt he had not heard one as of yet. “Bring me something,” Bohac said. After the hearing, Bohac sought to make clear that he is not necessarily against making changes, but he needs to be convinced through data and not just emotional arguments.

Richard Evans with the Texas Alliance of Non-Subscribers – an advocate for large companies that don’t participate in the workers’ comp system but do offer plans of their own – told the committee that “some employers might opt out because they want to offer higher wage replacement.” Evans said “that’s not to say everybody does it.” He said that not every alternative plan has “all the bells and whistles,” but there are many employers that offer great plans because they’re in competitive environments. Evans said his group has been working with its members to make sure their workplaces are as safe as possible.

The Texas Association of Builders’ Ned Muñoz said workers’ comp has been a hotter topic during this interim than it has been during his 8 years with the home builders association. The vast majority of their group’s members carry workers’ comp and have stepped up their efforts to keep their employees safe, Muñoz said.

Muñoz said that the kind of proposals filed previously by Rep. Armando Walle, D-Houston, to require workers’ comp specifically for the construction industry are unfair. “I think if The Legislature does choose to go forward with a mandatory workers’ comp plan …that it should be across the board and not single out one particular industry,” he said. Walle has said his rationale is simple: Construction is the most dangerous industry in which to work and he’d like to protect workers as well as bring down costs.

Rep. Paul Workman, R-Austin, sounded frustrated by the efforts of some business groups and others to push back against mandatory workers’ comp for the construction industry. Workman, who is a builder himself, said the industry is particularly dangerous for workers and many times the subcontractors on large jobsites have very few employees for whom they carry no insurance.

The Business and Industry Committee hopes to have its hearings on these and other issues completed by the end of May, Chairman Oliveira said.

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