Audit: Missouri Lags in Finding Misclassified Workers

October 8, 2010

Missouri has lagged behind other states in identifying employers that avoid taxes and unemployment and workers’ compensation payments by classifying their workers as contractors instead of employees, a state audit reported.

The state review found that from 2005 to 2009, Missouri labor officials identified fewer misclassified workers during periodic reviews than every state besides Iowa. The Department of Labor and Industrial Relations found an average of 0.14 misclassified worker per check, but the national average was 1.36.

State labor officials say they have been working for about two years to identify more misclassified workers, changing procedures and expanding staff. Larry Rebman, the labor department director, said the number of wrongly classified workers identified by the agency has increased from 180 in 2008 to more than 2,300 so far this year and that collections have doubled since 2008.

“We are identifying those people who are cheating the system and leveling the playing field,” Rebman said.

Workers wrongly classified as independent contractors can pay higher taxes on their income and miss out on health and other benefits. Some employers misclassify employees intentionally but others do so accidentally.

“It’s a bad deal for the employee,” Auditor Susan Montee said.

The state also can lose money. State labor officials estimate misclassification of workers cost the state unemployment fund $10 million in contributions annually, the workers’ compensation fund $215,000 and the Second Injury Fund $646,000. It also led to the underreporting for taxes of $423 million in wages.

Another government review estimated misclassification of workers costs the federal government $1.6 billion annually.

According to the state audit, Missouri conducted random checks of employers rather than targeting industries more susceptible to problems. The state also has not conducted follow-up checks of employers found to be misclassifying workers.

The U.S. Department of Labor recommends that only 10 percent of checks for employee classifications be conducted randomly.

The state labor department says it now follows that recommendation and focuses compliance checks from pools of those considered to be high-risk, high-error or noncompliant. In its written response attached to the audit, the labor department says it is working to focus on employers with the most discrepancies.

Labor officials say they also plan to develop a procedure for conducting follow-up reviews.

Besides the process for reviewing employers, the auditor’s office said another problem was that Missouri’s law for differentiating between “employees” and “contractors” was more cumbersome than other states.

Missouri uses a 20-factor test while others use a three-factor test. The auditor’s office said the longer test is more subjective.

Developing a new test to determine whether a worker is an employee would require action by the Legislature.

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