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House | June 17, 2015 | Committee Room | Commerce and Job Development

Full MP3 Audio File

Welcome to the committee on commerce we are going to go ahead and get started am going to introduce our sergeant at arms Yeing Bay, Bormo West Jim Morine and David Liten I also want to recognize our pages Fred Kennedy from Halifax representative Michael Ray Magge Buyer Johnston county representative the sponsor is Peter Moore, Jolam Hillamon Wake county respond to CC representative Hamilton our junior from Wake county is sponsored by representative Hardcock Mathew Linus from Mecklenburg county sponsor is representative Denom and Magee from Union County representative Dinam okay our first bill up is from representative Penalty to provide here they will be only alone here it is house bill 482 the employee fair classification act and you are ready there is a motion before to have the PCS before the committee representative Brown has your all in favor aye and all opposed thank you we have the PCS properly before the committee representative Penotin I thought you might. On your mic. You keep me in line. Anyway representative Bishop, representative Ford should be here any time and representative Scooter are the primaries on this bill. This has been going on a long time and it got my interest last number when the news and the blogger wrote out a five-day articles on this, I was sort of paying attention then I had a [xx] and the concrete business call me about it, and how many businesses will be put out of businesses because of the bio-act laws in North Carolina. So the bill is very in depth and we can go over point by point you all can ask questions of course as we encourage you to do, but if you could please take out this whole document and let's just sort of go through a thousand numbers. I like that. Okay. Now the problem with this is, so many employers are listing their employees as independent contractors when they're in fact employees and there's no estimate that it will over a hundred thousand North Carolina's hotel, how many they're all, but when this happens, just in Wade county alone we've had two workers killed in the last year, and they were deemed to be independent contractors when, now they'll loose but that family of the worker killed will not get any worker's compensations payments for probably a number of years until they go through all the legal to the click to tell the business they in fact were, and you're going to have to pay out of your [xx] if you can't get your insurance company to pay it but a lot of these companies go bankrupt at that time, so they don't get anything anyway, so this is to protect people our workers that are disabled or their short term disability are disabled for life to protect our workers, I think this is the number one reason for this bill worth anything more important than that, now when you get somebody disabled or somebody that's can't provide income for themselves, then it greatly increases the cost of welfare payments by the counties, because they have to step in. Our usually and creating them and they don't get any compensations for them. So that's on our workers number two, is many awful, lawful employers are being put out of business by these rogue employers. It was a concrete finishing firm with that left Florida it came to White County, and in 2 years they control 80% of the concrete finishing work, because Florida passed the law that's $5000 funds our

bill clauses of $1000 fine, and they also have ceased and deceased orders where they can actually shutdown the business ours doesn't go that far, and what we all see, everybody involved in this bill, what we all see is passing the bill, and in the fire first [xx] that would report to the secretary of revenue would be on his primary stair and let's go to work on it and next year come back and if it needs to be changed some. But we have the most liberal laws for the and the benefit of liberal employer of any state in the south. Let's just take this concrete finishing work what they do is they have a number of foremen, and they are on the worker's comp policy, so they do have worker's comp but then they treat the actual employees of these, I understand they have 12 work crews. They go out with the foreman, they are clearly employees but they are treated as independent contractors so they have no worker's compensation. So what they do especially on government where everything goes to the lowest bidder, they are able to underbid the lawful employers who are trying to do right and they do that. They don't sensor independent contractors. They don't have to provide health insurance as mandated under Obamacare so they don't have to pay health insurance for part of health insurance. They don't have to pay social security. They don't have to pay worker's comp. They don't have to pay unemployment. So it works out about 20% that they can underbid people that are trying to live within the law. I have talked with many of the people that have been put out of business by this guy. They had good businesses and they looked after their employees and they complied with the law but it's hard to compete against 20%. North Carolina lost approximately $191 million last year in taxes. These are State income taxes that should have been withheld and weren't withheld and unemployment [xx]. DHHS said that about 40% of the people that are behind on child support payments are 199 employees. 40% for 1099 employees, and it's very hard according to them to [xx] this income. It's no problem if you're an employee you get your W2 employee, because employers got to withhold, have the pay, pay [**] and withheld for child support. So this creates another problem in itself. I didn't even know that until we got into the bill. And the companion bill Senate 694 was introduced by Senator Newton and it passed the Senate unanimously. So, there's got to be something right about it. Now this flow chart here, if everybody will pick up that, this flow chart just shows you how this section will work, and they'll be like a quarterback of a football team. So the director and their five employees will be in the middle and they will, complaints will go through them and they will refer complaints out to informal security, to part of the revenue, part of the labour and in industrial production, and vice versa, those state departments will refer and practice back to that, so it looks like if you don't keep workable situation, we're trying to patent and after DMV section for years that has if you don't keep liability insurance on your vehicle, before then you come get your licence. So the enforcement that we have, I mentioned earlier with $1000 fine, we do give people, this is not on the first occurance, we do give people some chances and the other one is, if the licencing boards can pull your licence, if you don't have workers comp on your employers now the way these people get around it is a by-worker's count policies and the [xx] we have it. What this section is going to do. They're going to take the people that are probably offenders and they are going to

get, request the worker [xx] policy from the insurance company. So the State will have an insured interest. And they'll furnish that to this section and in this section we'll go to employment security and get the quaterly wage and earning report that all employers have to complete, and look at it. If you see a copy that has a million dollar payroll is reported to workers cut policy, $10 million reported to inform security commission, you probably got an offender and they'll go to work on. Representative [**] we have several people that want to ask questions if it would be okay? Okay, he doesn't. Representative Avila. Where is she? I'm right here. I have an issue I guess first of all as a republican conservative with another division and having been a 1099 and W2 employee, and an employer, who was in a business that could have treated people as independent contractors and didn't, I guess my question is why can't we work within the system we got? Because an independent contract by definition is fairly easy to identify. They pretty much do the job their way, their time and with very little supervision. Now a brick layer, a finishing contractor, cement crew member, I'm sorry, that does not, right of the bat, fit that description because you're told who, where, when and how. So what prevents us from using that definition in current law that we got in tightening up through the department of the Secretary of State Office which licenses or permits these people to do business in the State of North Carolina that's the first step. Let me get my staff that currently appear. Representative Avila I think actually that's actually what this bill does, that is to say it doesn't change the law as to what an independent contractor is versus employee, it quantifies existing law that about that difference is, and the other main function is to make someone responsible in some office for giving attention to this, and enforcing the law in order to create the level playing field that enables people to compete. So I actually have as you say, as a conservative, I have some concern about establishing as you say another division, but this law, all the law the requirements of compliance on the differentiation between employees and independent contractors it exist, it's burdensome to no doubt, and I'm always willing to consider if there are could I ask that to that you be eliminated or can be that that be the case but what we face, what these articles may point and I think we all know, is that there is a widespread situation where the playing field and competition is on level because of folks who are prepared to flout the law, and they've just not really an effective any particular enforcement presence by the state. This creates a relatively small enforcement presence and the sanctions fairly modest to get started and they can increase, and again as Representative Pendleton said we may need to come back and address it, but it seems to be a minor or relatively modest effort to bring some enforcement present so we try to level the playing field and see how it works. So I don't like desire to create more regulations, but I think we owe it to people who are law abiders that they're in a level playing field competitor. Thank you Representative Torbett. You have a quick follow up, okay. Just a comment, you mentioned this as the modest approach, I think EPA started out as a modest approach too. Okay Representative Representative Torbett Thank you Madam Chair my question is for anyone not so much about the basis of the bill about the mechanics number 5 senator Peddleton pointed out that the companion bill for Senate Bill 694 had passed unanimously where's that bill? Did that bill cross over or did we choose not to address as a different or identical copy? I guess it's just some question That bill cross over is it in our rules committee and Senator Newton wanted to meet with me and we met with the staff attorney and did some made sure a few things is in his bill just to make sure everything is Okay. If he said Gerry I want you to rend your bill, I won't mind to just die in the rules committee. Okay Representative McGrady Can I [xx] Very quickly

because we have got a lot of people Alright I know you are trying to rest make but we [xx] can't say this section ever have more then five people because when we start forcing this we might be able to only have one employed 24 years now, I hope Okay Representative McGrady I support the bill as a person who is run a camp with a lot of employees. It was irritating for me to find out that other camp owners were treating people who are doing the same job as independent contractors and thus lowering their cost. I then had the experience of my daughter, this is in another part of the country, but same issue been treated as an independent contractor an entry occurred and lumber hold who ended up paying for it no dad did. I went back and asked staff about what other states we are doing. I was told that New York and Illinois have been the most successful states in curbing employee mis-classification and that those states of form tasks force and New York actually had pass through law similar to the one that is bling for forth year. I don't think this is creating a new [xx] at all, what I think this is doing is leveling the playing field, and employees ought to be treated one way and independent contractors are ought to be treated another way, and at an appropriate time Madam Chairman I would like to make a motion. Okay Representative Floyd I'm in support of the bill there and I do disagree with you understand me be a little bit different I think the projection that you gave but a revenue loss as a little bit lower. I think we it was somewhere in the neighbourhood of 400 that we are losing from uncollected revenue when you look at the independent contractor and you look at the employee, normally when a contractor goes on a job he or she has the window 120 days when, the whatever day is the timetable for that job to completed now that independent contract, an employee can meet that schedule but indepent contract can't say that he's going to job and stay for two months and the come on and go to job, he can't do that, so therefore he have to meet that contract on time and that at the end of the year the trick is, at the end of the year that employee will pay a higher wages than he would pay as he was an employee of that organisation, so there is a lot other tricky way you know is done in there, and I think this is the first step was suggesting our environment, if your understanding what I mean by our environment, this is the first stage of doing that, and when you've that kind of money and revenue you mean loss is something that we as legislators, have to take a look at and see how we can get some of that revenue back into ours so of the revenue that we are losing and am a supporter of the Bill. Thank you very much, Representative Terry? Thank you very much Madam Chair. Quick question that is some Similar to representative Aphelos, because have sort of standing that same position has been employer and employee of 1099, but the reality about this is that, and have read it, but it's very custom am not sure is there a provision in this measure and I support this measure, let me say that very clearly. That absolutely forbids the cheaters. I heard you mention the $1000 fine and I know that Florida has a $5000 fine because people have done egregious things in this area and they should be fined but where is there a prohibitive. Is there a line in this bill that prohibits this kind of cheating? Thank you Representative Terry for the question and the answer actually is this is already on wobble. There're already, there's long standing law that concerns the classification if someone is an independent contractor or an employee for. workers compensation purposes, for tax purposes and so forth so it's already prohibited, this is just a question of something that enforcement is been lacking consequently is rampant and needs to be addressed Thank you, Representative Brody Thank you Madam Chair. Let's face it, the construction industry is probably notoriously a

violator of this and I really have no problem with what you're doing. I just wanted some clarification, I got a several things and I know you've got to go from this committee to another so there may be time to work with you in between if any of this things that do ring a bell to you but I just want to go briefly to this. When you had a list of determination of independent contractors status. Now the potential problem I see is every one of this things, I can justify in a situation where this may be an independent contractor or may be an employee so this are this end up to be pretty vague and even at the end of your sentence here you kind of say this is pretty vague. What I would like to have you think about is put in some definitive things that where a contractor can actually know. We're not going to argue about the new ounces[sp?], we're going to know and I just put in an example, is somebody who may own their own tools, equipment's, supply's and supply materials, there you can almost say, okay, that's going to be an dependent contract, also provides valid worker com[sp?] policy, whether it's a ghost policy or another and product liability, these are things that are going to address, this will be definitive. Next one I have is you go to page four in your bill and I have a question which asked as a general contractor now, I'm I going to be responsible to monitor my subcontractors if they comply? with this, and the reason why I say that is in this it says that if an applicant or later on in here as applicant has to certify that I understand this. Now, as a general contractor, I'm the applicant but I'm the one who in turn will hire a subcontractor to do that work and the second to last one, I'm trying to be quicker on this thing here is through the years, I've been doing some 30 years and I ran across somebody who turned around and says, you know what? I'm I'm your employer even though I hired you as a subcontractor, I'm your employer. And if we start a bureaucracy, sometimes bureaucracies take control and then you have to urge about an unmarinated claim that a person is now claiming to be an employee because I may have to have had him go or something like that. That, now all of a sudden they're making a claim that they're an employee, puts me through an expense of trying to challenge that and the last thing I just wanted to bring out is the which was what we have local city and county certifications, and here too it says the and even in the older one it says that the owner has to certify their intern, I'm going to ask you the second time is where I'm I as a general contractor even though being an applicant, I'm I going to be responsible for monitoring potential Sub-contractors, and honestly, there are times when there are framers and I would get the job I would give him a job for 15000 and invariably a half hour later I get a call from the bank because they cash it now do I figure that that's what they are doing is paying everybody cash well I can probably figure it I don't know I don't follow I don't ask but I'm I going to be held responsible for that Can I? Yes sir. That's a good point. We have worked with all the players involved. Between Senator Newton and myself, I don't know how many times this thing's been changed. You change it one way and some other crowd comes over here and they don't like that and it's been something else, but we made sure that the general contractors are responsible for their own employees. If you go on then you've got a sub contractor, that is a business entity. Whether a corporation, a partnership or just a plain old sole proprietor. They're responsible. Each entity of business he get a sub and a sub. You as a contractor not responsible except for your own employees, your own company. The other one that you and I talked about, it's been about a month ago and you had some good ideas on defining what the independent contractor wants. Senator Newton and most everybody I dealt with didn't want to add to the

list right now North Carolina operates under case law it goes back to about 1945 something like that they didn't want nobody wanted to change that because the thing you said about providing you own vehicle and tool that's a good way to define it but nobody wanted to change our case law. Okay thank you very much we still have eight people in the queue so we kind of have to go quickly yes slightly around. Representative Robinson Yes I've of a couple of questions One [xx] is on page three [xx] under section D, which discourage but then it provide asteroids on the review commission for secure fact that are left a registered both time and I want to employ each member of this legislative legislature not to direct an agency to make rules because when you do they make rules with such latitude that they interpret them any way that they want it, on usually on a case for case bases, that what commission does, that just the statement but proceeding down in line 23 when were talking about determination of independent contract as starters and this eight print save there, one through eight that determine where their individual are in independent contractor but then down in line 40, it says the presence of one or more of the foregoing factors is not controlling nor is the president of all of this foregoing going factors required in determining whether the individual is an independent contractor, how in the world, that doesn't say anything. Let's say a person home caned beans, so mum [xx] don't have to be, so what is it? Go ahead Disper. Thank you, one of the problem that makes this Aerial of the lower floor with difficulty in reach frankly to an enforcement issue is that it's by definition of facts and circumstances touched whether or someone in the independent contract are unemployed and depending on the particular industry they are in, certain factors can become more significant than the others, so in the tracking in street for example you have a lot of folks who have a permanent attachment to a tracking company they may have work rules or that are quite detailed or nearly that indicate their employee, but the own equipment their own equipment their own visit down the league and they are under a contract relationship they are independent contractor so various industry by industry and makes it difficult, but I think that's the reason that's drafted as it is that just clarification of existing law about how you distinguish, and factors can be better upon to the point representative Browdy made there are situations where you have people who yeah it if there is a problem if there is a close call that's why the enforcement that's here is only applied if there is a will for violation because there is a lot of situations where is not a close call at all it's just a question of breaking just regard of the law and that's what this is designed to address if you have a close the way the things set up if there is a better way we are glad here, but what it does it says if you are engaged in braitn willingful misclassification we are going to have enforcement mechanism to get you, but it should not let people who are in close calls. Okay thank you representative Richardson. Thank you Madam Chairman I have a couple the questions and one deals with someone is going to have to inform somebody that someone is doing something wrong so is there any protection in this bill that will not create a retaliation against the person who reports the wrong doing? how would you know there is undoing unless someone tells you for example I'm working and I see that something is going wrong at my job and I call these hot lines but somehow another amount of my employer finds out that I told you. So, is there any protection from retaliation? That's my first question. The second one, what if if someone assists me in setting up my business, is there anything in this field that will punish that person for helping me to set up a business that will use misclassified people and thirdly, is there a limit on how many people can be employed? Because it says the number of people, the director has the discretion to hire staff as needed and investigators or whatever. So, those are my concerns for this particular bill. I like the bill but I

just wanted to know, is there anything in here, or should there be something in here to protect those entities that I asked about as far as an employee that calls in, and going back to Representative Brody, each business entity North Carolina will be given a poster that they need to post in an area of what they can do. What is an independent contractor by the numbers and so an employee could call in if they want to, but it's not encouraging the employee, it's just so that people can read it and have something I don't know what that's going to say, but it will be in work places like other notifications on the work place. What was the other thing? what if I helped someone set up an organization, is there anything in this bill. There's no penalty. Nothing to penalize. And the third one was a limit on the number of staff, because it says the director will be given adequate staff that he feels is necessary yes. We've got an appropriation of $393, 000, five employees. Now Senator Newton's bill warned be high level that it had to be appointed by the governor, and the director of this, had to be confirmed by the Senate of the House, this is going to be an employee of the secretary of revenue, it will be a $50, 000 year job, it will not be a half hour job. Basically clerical work these people it will have four $40, 000 employees, but to grow the bureaucracy they would have to come back to us and get more positions but we discussed. I wanted to put it in industrial commission, and then came back and said now let's put it insurance and then somebody came back who's put in labor, and then finally we all decided revenue because they have a lot of enforcement arms they have a lot of debt collectors so that's why I stood up. Thank you. Okay. Thank you very much. Representative [xx] we've got many people on the queue. We're going to vote on this today. Go ahead I have got some experience with this also because we hire positions as either contractors or employees but it seems to me the the same we worry about is ILS, I don't see anything here how this department will work with or inform the ILS, I can see is been a very powerful department with the threat of getting ILS involved. Okay, this is not addresse it should be in there, but the way it's going to work is Department Of Revenue, they're the ones who are going turn it in the IRS, now Representative Floyd said is about $400 million in loss income a year, and that is and 191 for the state and the differences in federal income taxes and federal taxes, so revenue will report IRS. Okay, thank you very much. Representative Millis. Thank you Madam Chair, this looks quick, it's my understanding by reading the bill that this division which is called The Employee Classification Division is going to be created within the department of revenue so it's going to be an entity of an existing bureaucracy, and Madame Chair I'd like to have a quick follow up once that's confirmed by the bill sponsor. Representative Pendleton. I had it set up as a section but Newton's bill had a division it really should be a section Follow up just a follow up comment is that in regard to creation of bureaucracy and thanks to that nature I think we have to the aspects of the role of government and distinguish the aspect of muscle from fat, and I think what you guys are doing here is wonderful I applaud the hard work this is a very difficult issue to address matters that affect all citizens employees, employers, independent contractors to the whole nine yards, and I think on the aspects of a proper role of government is that in reality, law is only law to the citizen if it is enforced, and I think the actual mechanism that you all are setting up is to make sure that the existing law that Representative Dishion is articulated that has been certified through out years and decades of case law, is actually going to be enforced and I think that the fact this bureaucracy that's created within this existing department will actually be self sustaining from the aspects that if you deal with the revenues that you will receive by actually enforcing the law as currently written, we are actually taking care of itself. Thank guys for your hard work. I applaud this bill, and I just want to back up Rep. McGrady on the motion.

Thank you very much. Madam Chairman, can I quote in the paper there was. Representative. Pendelton Representative Miller is in favor of more bureaucracy. In the haymaker. In the haymaker. Thank you, Representative. Tyne. Thank you, Madam Chairwoman I agree that there's a problem. I question whether we're focusing on the right area in order to correct the problem. 1099 employees are still required to pay the FUTA and the SUTA or both sides of it. They are still required to carry workers' comp. They get an exemption if it's one to four employees including the individual that runs the business. So all of the things are in place for 1099 that they are still supposed to carry worker's comp, still supposed to pay the taxes. So I'm Not sure that it's the classification of the 1099 that we should be focusing on as opposed to actually following the rules of both 1099 and employees, I don't know that we're really solving the problem because all your really doing is if you decide they should be a employee as opposed to a 1099 which I think is an IRS function really should be as opposed to the things you put in here from page three line 23 through 45 or so which is your alls determination of whether they are a 1099 and then we're setting up two set of whether they are 1099 or not really we should be focusing on are they following the rules that they are supposed to meet as a 1099 or an employee. Representative Pendleton. You're exactly right, and let's just take your situation. You're an insurance agent for nationwide. Now Nationwide and companies like All State, Northwestern Mutual, companies like that, they have that situation on 1099s where these things are done. but me as an independent insurance agent I get about 40, 1099 from different insurance companies, and nothing is taken out on my 1099 nothing, I don't have time for worker's thank you Representative ALvo  I am an independent contractor. Go ahead sorry because actually I'm an independent contractor I'm and I have 1099 people who follow the same contract that I'm give in regards to, I carry worker's cars my employees, either I provide a worker's camp policy for them, to my worker's camp policy see or I pay for them as workers con people. It's outside of what the 1099 designation does or does not do. so those are two separate issues in regards to who carries work, if any employer or any contractor does not provide the workers coms and they have to provide to them a certificate of insurance saying that the individual is covered in order for a General contractor to avoid the worker's premium on the employee, sorry to talk in circles.  Thank you. Quickly madam Chairman representative Tyler, respectively you're correct but an independent contractor has a responsibility for your self employment act, has the responsibility to do other things that are responsible. But what really is occurring in practice is that it is a pre-textual response to say what was doing it as an independent contractor because it's right with non compliance so and what you actually have is because there, if you actually go through the definition and apply the test, honestly it's not a first question, people who are playing by the rules are bearing their responsibilities as employers of those persons, and meeting an obligation at cost and they can't compete because of that. So with respect, I agree, I don't disagree with the, in terns of literally have a low works but as a practical matter, what happens is a great economic disadvantage.  Thank you, you're next representative Avila.  So let us listen into The couple of comments and then particular what representative Tyler had to say, is there no way we could have people who hope to be independent contractors have licence to be a least licence independent contractor with the responsibilities to take care of their workers cub and things of that nature so when somebody hires the guy unless he's got a workers cub licence, or an independent contract licence, he can be hired as an independent contractor? Representative Pendleton very quickly. Well you would have to setup a big bureau proceed to do that.  Excuse me, it's done through the secretary states office when you decide to do business in the state of North Carolina. Okay, thank you very much, we have Ryan Minto from the governors office, I'm going to give you one minute. Thank you Chairman Presnell, thank you members of the committee, Ryan Minto

office of the governor, thank you representative Pendleton, and representative Boles, representative Bishop for your hard work over this past five months. Employment classification is an unfair and harmful practice and inflates significant harm our State, its workers and its businesses. Over the past year, Governor McCrory and his administration have made eliminating this destructive employment practice a priority and have worked closely with multiple stakeholders to develop comprehensive reforms that will safeguard the interests of North Carolina's workforce and business community. the governor appreciate senator Nude and representative Pathothim and others working with industrial commission and others in the administration this comprehensive registration. The administration is committed to addressing employments classification through reasonable comprehensive legislation that protects our State's workers without creating additional burden upon the business community we support the bill thank you thank you very much very quickly representative Shephered thank you madam make questions were answered but I do say I appreciate you weer working on this basing on what we have been reading on news and television is definitely problem we can set here nic pic some of the things that run this but all took up the task and you are trying to do something about it which is more than most of us can do thank you thank you very much representative Bradford lets take vote in this so all in favor and you probably need a motion I need a motion you are exactly right representative [xx]   I am prepared making motion favorable as to the house committee substitute unfavorable to the original bill on a referral to judiciary two Right all in favor, aye all in opposed the ayes have it this meeting is adjourned