Business owners who use subcontractors packed a hearing room last week to support a bill that would loosen requirements on paying unemployment taxes, saying the state is unfairly cracking down on them under a law that is 70 years old.
Democratic Rep. Janet Mills of Farmington is sponsoring the legislation on behalf of the small business lobby, saying she had heard from people in her district that the Maine Department of Labor “has been coming down hard on individuals and small contractors this year,” for not paying unemployment insurance for workers they have long-considered independent or subcontractors.
“These subs are small business people who routinely do work for many different people during the course of a year, who often set their own schedules and work conditions, who pay their self-employment taxes and their own social security tax, who do not claim unemployment when a job ends,” Mills testified.
The Department of Labor is against the bill, saying it would weaken protection for Maine workers. It is citing a Harvard University study released last year that showed about 14 percent of Maine construction employers are misclassifying their workers when it comes to the need to pay the unemployment tax.
Business owners in the audience testified they had been subject to labor department audits and required to pay from $2,500 to $10,000 in back unemployment taxes.
At issue is what’s known as the “ABC” test for determining whether a worker is an employee for the purposes of the unemployment tax. That test is more stringent than the law for federal and state withholding tax or workers compensation insurance.
“We were told that we could not pass the test and that nobody in the state could pass the test,” said Andrea Knight of Knight Flooring in Windham, who was assessed $10,000 in back unemployment taxes after a state audit last year.
The “ABC” test says that someone is an employee for unemployment purposes unless the employer can prove:
• a person is free from control and direction of the employer in the performance of the job
• the service is either outside the usual course of business of the employer or it is performed outside of all the places of business of the enterprise of the employer.
• the individual is customarily engaged in an independently established trade, occupation, profession or business.
“The bar is very high,” Mills said. “The definition puts a nearly impossible burden on a contractor to prove that a sub is not an employee.”
Mills said the interpretation of the law often comes as a surprise to small businesses, as was the case for a number of floor and carpet companies who were snagged in audits in 2005. The majority use subcontractors to install the floor tiles and carpets they sell.
The legislation Mills is sponsoring would amend the “ABC” test to require employers prove “A and B, or A and C” instead of all three, she said. The Labor Committee is scheduled to take up the bill again on Thursday.
Labor Commissioner Laura Fortman provided testimony to the Labor Committee last Tuesday against the proposed change, arguing the “ABC” test is used by 24 states, including the rest of New England. It is also one of the smallest payroll taxes, she said, and applies only to the first $12,000 in wages paid. The average amount paid per worker in 2005 was $17.30 a month or just over $207 for the year.
Rather than being outdated, she said, the Employment Security law passed in 1935 does today what it was intended to do then, which is to protect Maine people from “economic insecurity due to unemployment.”
“Its intent is to provide broader economic protection versus narrower. This is why it starts with the presumption that employment exists and a business must prove otherwise by passing all three prongs of the test,” Fortman said in her testimony.
She said unemployment compensation helps fuel the rest of the economy when a person is out of work and cutting back on the numbers of people eligible to receive it could hurt other businesses.
Jim McGregor of the Maine Merchant’s Association is supporting a change in the law on behalf of floor retailers, who historically have been allowed to use subcontractors as installers.
“What I think is behind this is the desire by the state to get as many workers as they can on employee rolls,” he said, so employers have to provide more benefits, including mandatory health insurance down the line.
There is a cost to providing those additional benefits, he said, beyond just the tax.
“We think the inability of these retailers to hire subcontractors to install their product could put some of them out of business,” McGregor said.
Floor company owners who testified said they share a pool of installers because they don’t often have enough work to keep crews busy all day or all week. The installers use their own equipment and sometimes even their own glue, and carry their own liability insurance. Installers don’t file for unemployment, store owners said, but rather look elsewhere for another job.
Barry Stewart of Maroon Flooring in Waterville said he couldn’t afford to hire installers full-time because of the “ups and downs, both seasonally and through the day,” in the business.
He was fined $2,500 for back unemployment taxes following a DOL audit of his books last year and will now have the expense of paying those taxes going forward.
“The company could have used this money otherwise,” he said.
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