Below is a HillCo client report on the April 22 House Committee on Business and Industry Hearing. The committee met to hear testimony regarding:
 
The voluntary nature of workers' compensation in Texas and how it meets the needs of employers and employees;
 
The issue of misclassifying employees as independent contractors on workers, employers, income tax withholding, and the unemployment insurance system. And the review of current statutory deterrents, including those required by HB 2015(83R); and
 
Legislative oversight of the following agencies: the Office of Injured Employee Counsel, the State Office of Risk Management, the Division of Workers' Compensation of the Texas Department of Insurance and the Workers' compensation research and evaluation group in the Texas Department of Insurance.
 
Legislative Oversight
 
Rod Bordelon, Workers’ Compensation Division, Texas Department of Insurance

  • Since the last major reforms went into effect in 2005 many significant improvements in workers’ comp have been seen in the state
  • About 2/3 of employers in Texas purchase workers’ comp policies so about 80% of employees are covered in Texas
  • In Texas the system is entirely voluntary; Oklahoma just started a new opt-out policy
  • More medical providers are treating workers’ comp cases today than ever before
  • The operating budget for the division is around $40 million which is funded wholly by the maintenance tax from policies; no GR is appropriated
  • Still trying to improve in the area of hearings
    • Overall, disputes are down; about 5% of claims end in disputes
    • More disputes are going past mediation to a contested case hearing
  • The agency recently streamlined accident prevention and utilization review rules
  • Rep. Paul Workman asked if there is a statutory requirement to adjust­­ average weekly wage numbers
    • They are tied to the state average reported from the workforce commission
  • Chairman Rene Oliveira asked how many employees are working for non-subscribing employers that do not provide some other type of benefit
    • Will provide that number later
  • Oliveira noted that it is probably around 5-10% of people in Texas who have no coverage or alternative occupational benefits
  • Oliveira asked if an employee has no coverage but gets injured, what does the agency do for them
    • There are employees within the agency that walk people through these situations; if they do work for a non-subscriber the agency can only let them know what their rights are under the law
  • Oliveira asked if the division has any research on the number of suits filed and the outcomes
    • Most of the suits have to do with finding the appropriate impairment rating; a greater percentage of case judgments lean toward the employer; whoever is in dispute of the doctor’s impairment rating has the burden of proof, which is generally the employee
  • Oliveira asked why doctors are flying around the state to see patients
    • Designated doctors must go through training and take an exam; then doctors are matched up to the particular injury need based on their training; there is a list of doctors available for appointments in every county and whichever is the next available doctor is the one who is called; the doctor bears the expense of the travel
  • Oliveira asked if there is any investigation ongoing regarding doctors treating workers’ comp patients
    • Not currently
  • Oliveira asked about the penalty for not posting a notice that an employer does not provide workers’ comp
    • If it can be proved that there was no notice, it is punishable by up to a $25,000 fine
  • Oliveira asked about using debit cards to pay benefits; will there be a fee for them to draw out money from an ATM machine
    • Trying to ensure there are plenty of access points, banks and ATMs, for employees to access funds without incurring charges; going beyond that and accessing funds from other locations, there would be a modest fee; trying to make the debit card optional
  • Oliveira asked what the hourly rate is for attorneys
    • It is $150 an hour and has not been adjusted in some time; looking at adjusting the rates right now
  • Oliveira noted that there is a lot of information regarding how employers feel about the system but there needs to be more data on how employees feel about the system
  • Rep. Armando Walle discussed situations where there is a dispute that could take months to settle and how an employee would not be receiving benefits
    • There are many types of disputes; most cases are not disputed if an employee cannot return to work; otherwise they would be working at the same time the dispute was going on and drawing pay; in other situations an employee could be receiving benefits at the same time a dispute is going on
  • Walle asked how injury rates are declining with the increasing high-risk jobs and increased employment around the state, especially in the energy sector
    • That statistic is a rate of injuries per employee; the number of injuries is increasing but as a percentage it is decreasing; work places are getting safer over time
  • Rep. Dwayne Bohac asked what the state requires from non-subscribers
    • Reporting is required; they must report their status of whether they are subscribers or non-subscribers and they must report injuries where lost time was incurred

 
Bryan White, Office of Injured Employee Counsel

  • The office provides assistance to injured employees through dispute resolution and ombudsman programs and provides educational services for employees regarding their rights and the role of different agencies
  • The agency resolves 60% of all disputed cases that come to the office
  • Over 50% of staff are fluent in Spanish and recent appropriations intended to increase support for other languages have allowed the office to support many other languages than Spanish and English including, Farsi, Bosnian and Somali
  • Oliveira noted there was a decline in cases where employees are prevailing in appeals and asked why more staff within OIEC doesn’t equate to more cases employees are winning
    • Those cases are just a small percentage of total cases
  • Oliveira noted more data needs to be collected to help make the system better
  • Oliveira asked about employee misclassification when one is injured
    • If an injured employee comes in who asks for assistance the office will try to find them in the workers’ comp database; if they aren’t in the database the office will inform them of their rights
  • Oliveira asked if the agency gets involved if a person says they are an employee but their employer says they are a contractor
    • Nobody in the office investigates those allegations

 
Jonathan Bowe, Executive Director, State Office of Risk Management

  • A major reorganization of the agency has recently been undertaken
    • A deputy executive director position has been created
  • Oliveira asked if any surveys have been done to determine how well the workers’ comp system is working
    • A vast majority of employees within the system who file claims never speak with the Office of Risk Management
  • Rep. Rob Orr asked about why operating costs for the office keep going up but claims cost is going down
    • Trying not to just pay every bill that comes through the door; it takes people and work hours to make sure the right bills are being paid; there has to be the right mix of controls and claims
  • The witness discussed situations where government entities, universities and agencies, etc. attempt to save money by not insuring their assets; Texas State University and Texas Women’s University both subscribe to this strategy, the Capitol building is not insured either

 
Amy Lee, Texas Department of Insurance

  • 19% of the Texas workforce that works for nonsubscribers equates to almost 2 million employees
    • 500,000 of that 2 million have no occupational benefit plan; that does not mean that employers will not pay claims that come in
  • Oliveira asked about the prominence of patient dumping where an employer drops off an employee at the hospital and indigent care programs pay for it
    • Do not have those numbers
  • Walle asked how data collected from non-subscribers is used
    • Many different ways; non-subscriber data collected is not as extensive but it is used for different statistics and analytics

 
Voluntary Nature of Workers’ Comp
 
Oliveira commented that there are many negative consequences that come from employers who do not subscribe to workers’ comp and do not provide some alternative coverage.  The health care for injured employees falls back on the taxpayers.  The amount of cost shifting needs to be determined to understand fully the severity of the situation.
 
Stephanie Gharakhanian, Workers Defense Project

  • When an employer doesn’t provider workers’ comp, a worksite injury can be devastating for the inured employee and their family
  • Texas construction workers place a disproportionate burden on Texas hospitals when they are injured
  • In just one Dallas hospital, construction workers accounted for 1/3 of the hospitals uncompensated care costs
  • There are far more fatalities and injuries in the construction industry in Texas than in any other state
  • Bohac asked if there is a profile of business that doesn’t carry workers’ comp in the construction industry
    • Many times they are subcontractors where employees are working on large construction sites for smaller contractors
  • Rep. Eddie Rodriguez noted the most compelling argument in this issue is the cost shift; companies who do not provide coverage and save money shift costs to taxpayers and others
  • Orr noted that construction is being honed in on but other industries need to be considered as well

 
Cristian Hurtado, Construction Worker

  • Told a story about his father dying in a construction accident; the bills totaled $30,000; there was no workers’ comp or alternative coverage; no attorney would take the case

 
Renee Lara, AFL-CIO

  • Injuries on the job happen fairly often
  • Alternative plans that have been mentioned in this hearing do not offer the same benefits; there are strict benefits and timelines, restrictions on doctors that can be used, etc.
  • Bohac asked why some businesses choose not to have workers’ comp
    • It likely has to do with squeezing more profit
  • Bohac noted he would like to hear a compelling case for why there should not be mandatory workers’ comp

 
Mike Cunningham, Texas Building Trades

  • Employees who have no workers’ comp coverage are at a serious disadvantage
  • Working to make workers’ comp mandatory on construction sites at the least
  • Many construction companies require that contractors provide workers’ comp for their employees if they want to bid on a project
  • Many times workers’ comp premiums are based on the level of safety and training that the employer provides; employers who do not place a high value on safety are generally quoted higher premiums and so they don’t provide the coverage

 
John Hawkins, Texas Hospital Association

  • Based on research, 1-4% of a hospital’s revenue is workers’ comp cases
  • Hospitals are required to report their uncompensated care to the state but they may not be able to show what percentage are job related claims
  • Hawkins detailed the process for determining if a patient is at the hospital based on a work related claim or not and how they determine the payer
  • Workers’ comp cases are really not a very large portion of uncompensated care in the state; that isn’t to say that there isn’t a great deal of cost shifting, work related injuries can account for millions of dollars in uncompensated care at every hospital
  • Oliveira asked if hospitals can help guide employees to government health care assistance
    • Generally, working poor do not qualify for Medicaid; it is mostly children, pregnant women and the aged and disabled; when people are dropped off at hospitals after work related injuries they are counting on the charity care policy of that particular hospital
  • Bohac noted the same arguments people are giving for not having private health insurance are the same arguments people give for not having workers’ compensation; whether it be because of misinformation, not being educated about the issue or not wanting to fund it
  • Rodriguez noted that some uncompensated care is paid for through disproportionate share payments, etc.
    • Yes but work related injuries are typically classified as bad debt and not included in reimbursement payments
  • Walle asked if expanding Medicaid would help with this issue at all to free up some charity care money so it could be focused on work related injuries
    • It would improve the financial viability of those institutions; the trends for uncompensated care are unsustainable

 
Richard Evans, Texas Alliance of Non-Subscribers

  • The alliance represents large employers who offer alternative benefit plans
  • Members include James Avery, Nordstrom, Christus Healthcare, Baylor Healthcare Systems, Sonic, Hilton; HEB and Wal-Mart are not members but are large employer non-subscribers
  • Over the last 20-30 years, non-subscription has become a very large industry
  • Typically these employers have federally regulated ERISA plans
  • This is beneficial because employers want to craft their own plans
  • Many members have very strict safety programs
  • Non-subscribers must report whether they are subscribers or not as well as very detailed injury data; the problem is that not enough non-subscribers are reporting injuries, especially small employers who may not know the reporting requirement
  • Would be a good idea to have an agency such as the Comptroller send out a reminder to report when they send out tax forms or reminders
  • Bohac noted the committee is curious about the small percentage of companies who are non-subscribers who do not provide their own private sector plan; it would be nice to come up with a solution for those employers
    • First need to determine why they aren’t carrying coverage; is it because of cost or not understanding it as a business need
  • Rodriguez asked if certain small employers are judgment proof in regard to being sued for job related injuries
    • Injured workers can sue; when you work for a small employer it is not very practical
  • Rodriguez asked if there is an exemption for employers that provide alternative coverage, could the association support mandatory coverage
    • The association, at this point, supports a voluntary system
    • Many states have small employer exemptions from worker’s comp coverage
  • Workman asked how many members of the association are in the construction industry
    • Probably none
  • Problems within the workers’ comp system are one reason why the association supports a voluntary system

 
Steve Weatherford, Darrel Flood Relocation & Logistics

  • Board member of Texas Alliance of Non-Subscribers
  • Working in five locations in Texas performing appliance installations and running Mayflower trucks
  • Have an ERISA plan to provide benefits to employees
  • Have around 250 employees and around 180 contractors around the state; require all contractors to provide some type of workers’ comp coverage for themselves and all of their workers
  • Non-subscribing is not for everyone; a non-subscriber must be able to invest in safety and to provide what they are promising to employees
  • Workman asked why the group continues to oppose mandatory workers’ comp in the construction industry; how can the state make sure a company protects employees of a small employer
    • The system cannot be mandatory because once it becomes mandatory general contractors will pass the requirement down to their subs and alternative coverage will no longer be allowed by general contractors

 
Ned Munoz, Texas Association of Builders

  • Workers’ comp has become a bigger and bigger issue in the recent years
  • Worksite safety is a huge issue and the association is developing a worksite safety plan in tandem with OSHA
  • The top three most frequently cited OSHA violations are fall protection, scaffolding and  safety plans
  • Singling out the construction industry for mandatory workers’ comp has been a big issue; would rather see it be made mandatory across the board
  • Oliveira asked if the witness agrees that the cost of workplace injuries should not be socialized
    • That isn’t good in any industry
  • Oliveira noted the cost has decreased for policies in recent years and the system has become more manageable; it seems like with 48 other states requiring workers’ comp there should be a system that could work in Texas; we need to be talking about solutions and stop saying that mandatory workers comp would kill business in Texas

 
Stan Marek, Marek Brothers Systems, Inc.

  • Of the many states Marek does business in, Texas has by far the best workers’ comp system
  • Started in the residential business back when employers could classify their employees as contractors and waive the workers’ comp requirement
  • It is estimated that over 50% of construction industry employees are illegal; when ICE does an investigation on a company and they find illegals they don’t deport them, they make employers take them off the rolls and they have to go to work as contractors

 
Misclassification of Employees
 
Oliveira noted that misclassified employees are a serious problem. They become a burden on the system and the taxpayers. The number of employers who misclassify employees is unknown, only the number of them who get caught is known.
 
Steve Riley, Unemployment Insurance Customer Service Division, Texas Workforce Commission

  • TWC is responsible for administering the state’s unemployment insurance system
  • Every employer is covered by the UI system and is required to pay taxes on the first $9,000 of an employee’s wages but not for contractors
  • TWC uses  20 common law factors to determine who is a contractor; an employee is only classified as a contractor if they are completely free of the person they are providing services to
  • Riley described the process that is undertaken when an audit or investigation is initiated on an employer
  • In 2013 TWC performed 6,000 audits and almost 2,000 employers misclassified at least one employee
  • The full impact of the new misclassification penalty from HB 2015 will not be known until there has been more time to collect data
  • Oliveira asked how the random audits are selected
    • A computer system is used to create a weighted random; employers with high tax rates, employers with a history of misclassification etc. are half of the selection; the other half are based on other reasons such as an employee filing for unemployment wages and then there are no wages in the account
  • Oliveira asked what happens to those who misclassify
    • The employer is notified, the tax wages are assessed and the interest penalty is assessed; there is also another penalty now because of HB 2015
  • Oliveira asked how a situation comes around when a person believes they are an employee then they file a claim and find they are a contractor
    • Generally a person goes looking for a job and the employer says they will hire them but as a contractor; the person may not understand what that means in relation to their taxes, etc.
  • Oliveira asked what industry has the highest percentage of misclassified employees
    • Medical companies such as doctor’s offices and dentists, construction; can provide the list; there is misclassification across the board
  • Walle asked for some of the 20 common law factors used to make a determination of what type of employee someone is
    • A continuing relationship
    • Set work hours
    • Order of sequence of the work is set by the company
    • Oral or written reports not required
    • Payment by the hour week or month
    • Payment of travel expenses
    • Furnishing of tools or equipment
    • Significant investment made by the employer
    • Working more than one job at a time

 
Stan Marek, Marek Brothers Systems, Inc.

  • The 20 point test is the most misused statute ever put out
  • The industry has learned to work within the 20 point test and get away with not having employees; when a company doesn’t have employees they can get away with a lot more of the ICE audits, IRS investigations, etc.
  • It is very hard for employers who have real employees to beat bids against companies who are not paying taxes on their employees
  • In order to get high school kids into careers, jobs need to be going away from the contractor style back to the hourly style where they will have benefits
  • There is a group of commercial owners in Houston who are beginning to require that their contractors’ employees are paid hourly and have benefits in order to strengthen the workforce
  • Workers’ comp would be a good place to start
  • Oliveira asked what is wrong with the 20 common law factors
    • It is easy to hire someone in a manner that works around those 20 factors
  • Oliveira noted that in this situation incentives may be better than punishment; maybe there should be a tax credit for doing business the right way
  • Walle asked if part of the problem is that Texas is a right to work state
    • Probably not; up until 1985 all commercial work was done through the union; the enforcement by governmental agencies got out of control; would like to see competition in the future but it is hard to see where the workers are going to come from

 
Stephanie Gharakhanian, Workers’ Defense Project

  • At least 40% of construction workers in Texas are misclassified
  • Results in an estimated $7 billion of wages that are going unreported to the state and federal government
  • Payroll fraud causes the Texas unemployment insurance fund to lose $54.5 million every year
  • Employers save between 15-30% on payroll expenses when misclassifying employees
  • Payroll fraud undermines the future stability of the construction industry
  • Misclassified workers earn, on average, $2 less per hour
  • HB 2015 was a significant step taken by the legislature but only applies to public works projects
  • Would like to expand the mechanisms available to the state to penalize payroll fraud

 
Mike Cunningham, Texas Building Trades

  • Misclassification is a cancer on the construction industry and the workforce in Texas
  • Have been waiting for the federal government to fix this problem for many, many years
  • If the penalties were enforced they would be a good deterrent to misclassification
  • The workforce needs to be educated in the area of misclassification so they know what could be happening to them
  • Bohac asked if the penalties are stiff enough
    • No

 
Cathy Dewitt, Texas Association of Business

  • Last session there was concern surrounding whether the state and federal standards would match; still want to make sure of that if something is changed this coming session
  • The system for cracking down on the bad actors needs to be strengthened
  • Most of the time the only complaints within the system come from competitors which isn’t a bad system
  • The Workforce Commission doesn’t find these types of things in audits (misclassification)
  • Oliveira noted that enough isn’t being done to deter this type of action; stiffer penalties may be the answer; the bad actors are costing the state billions of dollars

 
Ned Munoz, Texas Association of Builders

  • The association does not condone any misclassification activity
  • Last session the association wanted to ensure two things, that the standard is the same at the state and federal level and that the liability ends with the employer and doesn’t rise up the chain
  • The same problems are not as much of an issue in single family construction
  • Oliveira asked if the witness shares Marek’s concerns about ill-trained employees
    • Of course

 
Don Dyer, Professional Janitorial Services

  • Misclassification of employees is a huge problem in the cleaning industry
  • The cost of employing people the right way equates to $5.7 million per year for PJS
  • The problem is going to get even worse because of the Affordable Care Act and employers not wanting to fund health insurance
  • Another issue that nobody is talking about is child support payments that aren’t being paid because of payroll fraud
  • This is not a problem because Texas is a right to work state; it is a problem in New York and California as well
  • Tried to tell the TWC about bad actors but they said they wouldn’t take complaints from competitors, only employees; if they would take complaints from competitors they could catch a lot more people
  • The State of Texas has a procurement system that requires low bid; chances are the state is contributing to the problem with the cleaning crews that service all the state office buildings