Kentucky already has a growing problem with worker misclassification, in which employers inaccurately and often unlawfully treat employees as independent contractors. These workers are deprived of their rights, protections and benefits as a result, and Kentucky is deprived of tax dollars.
House Bill (HB) 465 would make this problem worse by incentivizing employers to misclassify workers, further undermining job quality for Kentuckians. Under current law, a worker is considered an employee if they perform work that is part of the company’s regular course of business and that would otherwise have to be done by the employer or an employee. Employers can treat someone as an independent contractor only if they perform a specialized job that is not similar or connected to the business and whose work the employer has no direction or control over.
One indicator that an individual is an employee is that they receive fringe benefits from the employer. But HB 465 seeks to get around that by allowing businesses to kick in funds toward one or more employee benefits for contractors without accepting the full responsibilities associated with employment.
In doing so, HB 465 essentially creates a new, second-class employment tier that employers are incentivized to shift workers to, saving corporations money and liability while leaving their workers underpaid and at greater risk.
Misclassification is already a big problem in Kentucky
When workers are misclassified, they take on additional cost burdens and lose fundamental labor rights, including the following:
- Minimum wage and overtime protections
- Unemployment insurance
- Workers’ compensation coverage
- Employer contributions to Social Security and Medicare
- Access to unions and collective bargaining
- Protections against discrimination and sexual harassment
- Access to Family and Medical Leave rights.
The misclassification problem is huge and growing. An estimated 10% to 30% of employers may misclassify their employees, according to a 2020 study from the National Employment Law Project. An estimated 26.4% of Kentucky construction employers misclassified their workers, according to a 2011 study of the state’s unemployment insurance audits. And a decade ago, the Kentucky Labor Cabinet reported the amount they collect in restitution for wage theft, of which misclassification is one major type, is more than double annually the amount stolen in robberies across the commonwealth.
Illegal misclassification hurts individual workers and the Kentucky economy overall. The study of misclassification in Kentucky’s construction industry found $11.3 million a year in lost revenue from lower income taxes, unemployment taxes and workers’ compensation premiums.
Kentucky not only has a problem with illegal misclassification, but with changes in law that make the practice legal. In 2018, Kentucky became one of only 10 states with a broad “marketplace contractor” law that broadly bars gig workers of app-based businesses like Uber and Doordash from the right to be considered employees.
HB 465 incentivizes more misclassification
HB 465 both supports companies in profiting off misclassification and helps them attract workers in a tight labor market despite degraded job quality resulting from misclassification. The bill will permit employers to voluntarily contribute money for benefits like health insurance to newly-defined “self-employed workers” while not allowing that contribution to be a consideration in whether those workers are in fact employees.
The result is a new tier in state law of “self-employed worker” who resembles an employee due to their receipt of some employee benefits but who still lacks the many other rights and benefits associated with employment mentioned above. If the bill becomes law, it will create an incentive for employers to shift more employees to this new tier, meaning cost savings for corporations and lower-paid, riskier jobs for workers.
The protections and benefits lost from employment status, which approximately equal 17% to 34% of compensation in commonly misclassified occupations, would far exceed any benefit employers may choose to provide voluntarily to these contractors, for which the bill creates no minimum standard. HB 465 is another step toward eroding hard-fought employment rights that are essential to economic security in the commonwealth.
Learn more about the problems with HB 465 in this letter from the National Employment Law Project.
