ELLSWORTH, Maine — New provisions concerning construction workers in the state’s workers’ compensation law have contractors worried about meeting the requirements or facing potential penalties.
The new rules went into effect on Jan. 1 in order to address what the state has identified as “misclassified” workers — workers who are treated as independent contractors rather than as employees. The provisions were added to the law to ensure that employers provide workers’ compensation insurance for all eligible employees.
Contractors are concerned about the potentially high costs involved in providing workers’ compensation insurance for workers they’ve traditionally hired as independent subcontractors.
According to the Maine Workers’ Compensation Board, however, there are negative effects from misclassifying workers. Uninsured workers lose legal protections and benefits if they are injured; the public pays the cost of subsidized health benefits; and employers who pay the premiums for workers’ compensation insurance have higher labor costs putting them at a competitive disadvantage.
A 2005 joint study by researchers at the University of Massachusetts at Boston and Harvard University reported that one of nine workers in Maine’s construction industry were misclassified as independent contractors instead of as employees.
The law, according to Jan McNitt, the assistant general counsel for the Maine Workers’ Compensation Board, sets a new legal definition for a construction subcontractor. It also creates the presumption that all workers performing construction work on a construction site are the employees of the person who hired them, McNitt told a group of contractors during an informational session Wednesday in Ellsworth.
It is up to the subcontractor to prove that he is not an employee.
To do that, a prospective subcontractor must apply for predetermination as a subcontractor. The application includes a 12-step test, plus several pages of information, including client lists, three years of tax returns and copies of contracts.
Compounding the problem, based on presentations Wednesday from the state Labor Department, insurance provider MEMIC, the Workers’ Compensation Board and the Internal Revenue Service at Wednesday’s session, predetermination requirements differ among the different agencies. Several contractors said they’ve thought they were doing things right only to find out that while they met one set of rules, they did not meet another.
Recent audits through the state’s unemployment insurance division have uncovered these discrepancies and some contractors now face stiff penalties from the state.
“There’s real terror out there on these audits,” said one woman, who identified herself as a business counselor for some contractors. “There’s no understanding. [State auditors] come in throwing around terms like fraud, penalty and jail.”
Contractors are so concerned about the repercussions of the law that many at the informational session in Ellsworth Wednesday said they were considering not hiring any subcontractors unless or until the law is changed.
“We’re at the point, where we’re considering just going without subs,” said one local contractor who said he uses as many as two dozen subcontractors on a job.
That is a frightening proposition for Janet Toth, the community development coordinator for the city of Ellsworth, who organized the session.
“That could hit the region and the city of Ellsworth,” Toth said. “Developers and contractors are planning forward. If they are shut down for six months, we’ve lost as much as three years of planning and development.”
Several building trades associations have weighed in on the issue and the Associated Builders and Contractors of Maine has developed a revised form that would be less cumbersome and easier for contractors to work with.
The Legislature’s Labor Committee is reviewing the new provisions of the law and proposed legislation to adopt the new form. The panel is scheduled to meet for a work session on the issue today.
“Something’s got to be done to streamline this process so that contractors don’t get whacked at the end of the day,” said Rep. Brian Langley, R-Ellsworth. “As a small-business owner, I felt their frustration. They came here looking for clarification and they left more confused.”
Also, the Governor’s Task Force on Misclassified Employees has studied the issue and is scheduled to release its report on the impact misclassified workers have on Maine this morning in the Governor’s Cabinet Room.