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New report finds misclassification fraud a growing problem in Minnesota

OLA report showcases the need for legislative action to combat misclassification fraud

March 14, 2024 (SAINT PAUL) — Today, the Office of the Legislative Auditor (OLA) released a report on employer misclassification fraud in Minnesota, which confirmed that misclassification is a growing problem in the state. The report underscores the need to address this serious problem by passing HF 4444/SF 4483, legislation which would improve Minnesota’s ability to combat employer misclassification fraud.

“Today’s report from the Office of Legislative Auditor confirms what my office has been hearing from people across Minnesota: misclassification fraud is a serious problem that we need to tackle head-on,” said Attorney General Ellison. “I sincerely hope the state legislature will take action to combat misclassification fraud this session to ensure workers receive the pay and benefits they are owed and ensure businesses that follow the law can compete on a fair and level playing field.”

A Growing Problem

In today’s report, OLA analyzed data from a 2018 Department of Employment and Economic Development audit to determine the recent state of worker misclassification in Minnesota. In comparing 2018 data to 2007 data, the last time OLA produced a report on misclassification, OLA found that the problem of worker misclassification fraud has gotten worse across multiple key metrics:

“According to the 2007 report, about 17 percent of randomly audited employers misclassified at least one worker. In 2018, 22 percent of randomly audited employers misclassified at least one worker—five percentage points higher than in the 2007 report.

When we examined data on the employers that misclassified workers, we also found that those employers misclassified workers at a higher rate. In 2007, we found that misclassifying employers incorrectly classified about 6 percent of their total employees. However, in 2018, misclassified workers comprised about 12 percent of those employers’ total employees.” (page 17)

HF 4444/SF 4483 would help combat employer misclassification fraud by expanding the investigative authority of enforcement agencies, adding additional penalties for violations, improving intergovernmental coordination, providing more remedies for misclassified workers, and more.

The Need for Greater Coordination

The OLA report also emphasized the need for greater coordination between the various state agencies responsible for addressing worker misclassification:

“While DLI, DEED, and DOR undertake investigations or audits that analyze whether workers were misclassified, they do so within their agency silos. For instance, each agency accepts tips or complaints from the public regarding possible instances of misclassification. Yet, rather than providing one central tip line that individuals can use to report misclassification, each agency separately provides ways to report tips or complaints. If an individual wanted the state to remedy alleged misclassification under all applicable laws, the individual would have to contact at least three different agencies (DLI, DEED, and DOR), depending on the nature of their complaint.

As another example, DLI, DEED, and DOR do not collaborate on their investigations. Many of the activities the agencies undertake that involve investigating misclassification are similar across agencies—for example, gathering documents or records, holding interviews, and conducting site visits. Yet agency staff undertake these activities separately.” (page 30)

On page 47, the OLA recommends that the legislature require “state agencies to take a coordinated and collaborative approach to addressing worker misclassification,” which is exactly what HF 4444/SF 4483 does. This legislation establishes an Intergovernmental Misclassification Enforcement and Education Partnership to increase coordination and collaboration among the five different government entities — the Departments of Revenue, Commerce, Labor and Industry, and Economic Development, plus the Attorney General’s office — that are responsible for investigating misclassification fraud and punishing violators.

That partnership would allow state agencies to coordinate investigations into employer misclassification fraud more easily and effectively, and it provide workers with one central location to report suspected misclassification fraud to.

This partnership would also help workers receive the restitution they deserve. The OLA report notes that, as things stand, the lack of such a partnership means that workers often do not receive the compensation they should:

“The extent to which a worker receives restitution for being misclassified depends heavily on which agency identified the misclassification. DEED and DOR’s efforts to address the effects of misclassification primarily focus on ensuring that employers comply with state law, not on obtaining compensation or damages for workers who were misclassified. When DOR identifies a misclassified worker, for example, the agency assesses a tax on the misclassifying employer because it failed to comply with state law. DOR does not seek to rectify the effects of misclassification on the worker, such as by correcting Social Security taxes that the worker may have overpaid as a result of being misclassified. Generally, DLI is the only agency that focuses on obtaining restitution for misclassified workers” (page 36)

The Importance of Quicker Action

The OLA report also called attention to the need for investigations into misclassification fraud to be conducted more quickly.

“We heard from staff at multiple agencies that their investigations—which include efforts to address specific misclassification violations—can take months or years…

Even if agencies complete their investigations quickly, the information used to identify misclassification often reflects the circumstances of prior years. DEED and DOR investigations occur as part of an audit—an inherently retrospective activity. For these investigations, DEED and DOR staff said they typically review data that are at least one to two years old. As a result, if either agency finds misclassification, the agencies’ actions to address those violations would occur long after the actual violations began.” (page 31)

“Lengthy investigations also harm workers and law-abiding employers. Employers may continue to misclassify workers throughout the duration of the investigation; during that time, misclassified workers may not receive the benefits or protections to which they are legally entitled. For example, during the investigation, the employer may not pay workers overtime wages or meet workplace safety requirements. At the same time, because the misclassifying employer does not provide workers the wages and protections to which they are legally entitled, the misclassifying employer continues to have an unfair competitive advantage over law-abiding employers who classify their workers correctly. The longer an agency takes to determine whether workers are misclassified, the longer misclassified workers and law-abiding employers are harmed.” (page 32).

HF 4444/SF 4483 would allow for more timely ways to combat misclassification fraud, particularly by adding misclassification to the grounds for a private right of action, which allows workers themselves to bring a lawsuit against an employer if they believe their employer is violating the law and committing misclassification fraud.

Background

On July 6, 2023, Attorney General Ellison formed a task force to study the issue of worker misclassification and its impacts on workers, the business community, and the public at large; explore best practices in policy and enforcement from examples based in Minnesota and in other states and jurisdictions; and propose a set of recommendations for both enforcement and regulatory reform.

The task force is co-chaired by Representative Greenman and Rod Adams from the New Justice Project, and both Senator Oumou Verbeten and Commissioner Blissenbach served on it as well. Task force members represent a wide cross-section of Minnesotans affected by misclassification fraud, including representatives from labor, the business community, and state agencies responsible for enforcing laws against misclassification, including the Departments of Revenue, Labor and Industry, and Economic Development.

The task force’s work is ongoing. Thus far, it has spent half a year holding meetings across the state to hear testimony from Minnesotans about misclassification and its impact and to discuss the best path forward to combat misclassification fraud. Recently, on a vote of 14-0 with 1 absence, the task force adopted a policy proposal for the legislature, which the current misclassification bill is based on.

 

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