Zurik: Penalties for 'Billion Dollar Blueprint' a slap on the wrist

BATON ROUGE, LA (WVUE) - Picture this: state lawmakers, trying to pass a bill to stop contractors from breaking the law. The picture might make perfect sense: It helps the state earn more money, helps companies following the law compete and helps hard-working Louisianans being mistreated by their boss. But this picture includes a lawmaker who's also in the construction industry.

"If you're going to live by the letter of the law, you probably also going to die by the letter of the law," said Senator Jack Donahue of Mandeville in a meeting of the Senate Finance Committee in summer 2008. That senator helped kill a bill that could have helped the state he's supposed to serve.

In 2008, Representative Pat Smith of Baton Rouge introduced that bill to toughen the laws for the misclassification of workers. That's when companies label their workers as "independent contractors" instead of employees.  Misclassifying gives businesses a 30-percent savings in labor costs - at the taxpayers' expense. A recent news release by the La. Workforce Commission sums it up this way:

Misclassifying employees as independent contractors can lead to companies not paying unemployment taxes, workers' compensation premiums and their portion of Social Security and Medicare taxes. They may also gain an unfair competitive advantage over competitors by improperly lowering their labor costs.

That bill passed the state House of Representatives, but when it went before the Senate Finance Committee on June 18, 2008, Donahue questioned the bill's impact on businesses.

"If the offense is $10,000 or above, it's 10 years at hard labor or up to 10 years at hard labor in jail and a $10,000 fine," Donahue said in that hearing. The committee voted that day to defer the bill, essentially killing it.

"I think Jack Donahue had a lot of influence over that bill getting killed," says Jason Engels of carpenters union.

"He was very, very concerned about the penalty phases that we had raised," Smith recalls.  "The original law says that the fee can be no more than $500.  And when we tacked $10,000 onto it, up to $10,000, then yes, there were some eyes that were enlightened, some ears that perked up.  And they began to feel that that was just too much."

Donahue co-owns a construction company, DonahueFavret, which renovated the Hyatt Hotel in New Orleans.  The carpenters union says it sent undercover investigators onto that job site.

"We had one of our own people that confirmed that misclassification was taking place on that site," Engels tells us.

The misclassified workers didn't directly work for Donahue's construction company - they worked for one of its subcontractors.

Businesses can save tens of thousands of dollars by misclassifying their employees.  Consider a worker who makes $35,000 a year and whose business owner treats him as an independent contractor. That means the business doesn't have to pay Social Security, Medicare or unemployment taxes for that worker.  For that one employee, it's a nearly $10,000 savings for the business.

If that business owner gets caught not paying that $10,000, he gets a warning letter for the first offense and has to pay back taxes.  The second time, he can get fined - but not more than $250 per worker per instance. Third offense gets up to a $500 fine. It's not until the fourth time that the business owner can be criminally prosecuted.

So if a business is saving hundreds of thousand dollars, and they risk only a $250 or $500 fine, why would they stop?

"You wouldn't," Engels contends. "The penalties have to be increased, through legislation, on these contractors to get over this slap on the wrist, to really put some teeth... Start putting some people in jail."

Rep. Smith agrees. "Why should they stop doing it, especially if you don't have enough investigators or you don't have people who are going out to check whether or not they're doing something?" she asks

Representative Chris Broadwater of Hammond thinks the laws on the books are sufficient, but that "the state as a whole has not done a good job at enforcing those laws," he tells us.

The laws for not carrying workers compensation coverage are tougher than the ones for misclassification.  Broadwater says many of the companies misclassifying also fail to have that coverage. "There, you've got up to 10 years in prison," he tells us.

Here's one problem.  Take the company CMC Drywall.  They work out of back of a Kenner insurance company.  According to the La. Workforce Commission, CMC carries workers compensation coverage but considers its workers to be independent contractors - a possible violation of the law.

So, a quick look into CMC Drywall reveals that they appear to be following the law by having workers compensation coverage.  Only by digging deeper, looking closer at the business records, do you find that this company may be misclassifying.

"Catching this type of activity has proven difficult," Broadwater says.

The state says it found more than 12,000 misclassified workers last year, but wouldn't say how many of those came from the construction industry.

But a closer look at the numbers show those workers compensation laws Broadwater mentioned may not be used frequently.  In 2013, of the nearly 2,800 workers comp fraud claims investigated, only five led to convictions.

Rep. Smith says our stories will prompt her to try and toughen the laws again. But Broadwater says it will take the collaborative efforts of state and local law enforcement, including district attorneys, to really enforce whatever labor laws are on the books. "It is a huge problem not only in Louisiana, but nationwide," he says.

Meantime, the carpenters union suggests creating a task force of different agencies to tackle the problem.

"I wouldn't be opposed to that at all," Broadwater says.  "I mean, this is something that helps legitimate business people. It helps legitimate workers. The folks that are doing things right, it helps them have a level playing field to compete on.  Ultimately it helps the state; it helps the economy."

Toughening laws and enforcement may make picture-perfect sense for taxpayers. But it will now be up to lawmakers next year to bring that picture to life.

We reached out to Jack Donahue for a comment on this story.  Someone in his office did open our email, but we never got a response.

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