EDITORIAL: The Labor Department Versus Small Business

by Nat Frothingham

The Bridge is just coming out of what has been, for me, a disappointing and sobering experience.

Here I’m referring to a two-year process of having been audited by the Vermont Department of Labor, with a first contact from the Department in April 2016 and a formal audit that began on August 19, 2016. At issue during the audit was whether The Bridge had properly classified its workers for the purposes of collecting unemployment compensation payments during a three-year period: 2013, 2014, and 2015.

The Labor Department identified three categories of possible worker classification.

First, employees, for whom The Bridge had properly paid unemployment insurance (UI) contributions.

Second, independent contractors, for whom no UI payment was owed.

And third, the disputed employees, for whom no UI contributions had been paid.

In its ruling, the Labor Department found that during the period, 24 individuals received compensation as workers for The Bridge. Ten of these 24 workers were found to be properly classified, and it was judged that the paper should have made payments to the state’s unemployment trust fund for the remaining 14. When the unpaid contributions, together with penalties and interest over the three-year period were added up, the Labor Department billed The Bridge a total of $4,157.71

During a meeting at the Labor Commissioner’s office shortly after we learned of the audit, I remember Labor Department staff members in the meeting room saying not once but many times, “You can always appeal.” And The Bridge did appeal.

First, The Bridge appealed to the department’s administrative law judge, who denied our appeal on March 3, 2017.

Second, The Bridge appealed to the next and higher level, the State of Vermont’s Employee Security Board. That appeal was denied on April 25, 2017.

And third, The Bridge had been advised that we could write a letter to the Commissioner of Labor and the Unemployment Insurance Director to ask that interest payments over the three-year review period (amounting to $1,113.75) be waived. That request was denied on April 24, 2017.

Yes, the money involved, being the back UI payments, interests, and penalties assessed by the Labor Department, became a painful financial issue for The Bridge, because I might describe the paper as a “day-to-day, paycheck-to-paycheck” operation. But it was more than the money that made the audit process both opaque and almost hateful.

When The Bridge made its final audit payment to the Labor Department a few weeks ago, I decided I would write this editorial about the experience. I also decided to seek out and report on the audit experience of other local business owners, and attempt a “best-guess” analysis of what is going on at the Vermont Department of Labor.

What, I wondered, explains why the Labor Department—without notice—would suddenly change the rules and launch an audit crackdown on vulnerable small-business owners? 

Then finally, I wanted to pose a list of questions to the Vermont Department of Labor, questions the Department had either declined to discuss or failed to answer.

True Colors, Montpelier

Bill McQuiggan, owner of True Colors at 141 River Street in Montpelier, said that his first inkling of troubles to come from the Vermont Department of Labor was a July 9, 2013 letter from the Labor Department that began with these words:

Dear Employer, The State of Vermont is required by the U.S. Department of Labor to complete a number of audits each quarter and your account has been chosen for review.

McQuiggan wondered about the letter and its possible implications. He had opened True Colors more than 20 years prior and always paid its Social Security, Medicare, Vermont labor and sales taxes on time. The letter didn’t mention subcontractors.

As the audit proceeded, McQuiggan was interviewed by Paulette LaMare, a field auditor for the Vermont Unemployment Compensation (UC) unit of the Vermont Department of Labor. LaMare asked to look through the checking account and for McQuiggan to fill out a questionnaire. This all seemed harmless enough. Then in a November 2013 letter, McQuiggan was advised by the Labor Department that he had failed to report taxes he owed to Vermont’s Unemployment Insurance Fund for subcontractors that had done work for True Colors customers.

As part of True Colors offerings, McQuiggan sells vinyl flooring, carpet, tile, and the like. Because these products did not create enough income to employ a full-time installer,  McQuiggan referred the work to reliable, professional installers.

“These installers had skills and talents I did not possess,” he said. They scheduled their own installs, and customers were billed from a price schedule provided by the installers. Installers had to use their talents to install the flooring products to the customer’s satisfaction.

The case with the Labor Department eventually went to arbitration. The Labor Department uses an ABC test to determine if someone is an employee. True Colors passed two parts of the test, but because of one sentence on an old website for True Colors stating the they “provide professional installation for their flooring products,” the Labor Department extrapolated from that one line that all the installers were in fact employees.

So the Labor Department prevailed, and the installers had to be listed not as subcontractors but as McQuiggan’s own employees. McQuiggan was then promptly handed a large bill for state unemployment insurance fees, fines, and penalties for all subcontractors that had done work for the previous five years, amounting to thousands of dollars. True Colors flooring sales plummeted as a result.

Looking back at the appeal process, McQuiggan said the whole process with the Labor Department is stacked in their favor. Small businesses do not have deep pockets to prove their innocence against a large governmental machine, so they are guilty as a result of a lack of money to present a good defense.

“I feel that this is more about entrapment than educating small business owners about their relationship with subcontractors. At that time there was no warning about these audits or their implications. Our accountant was even surprised. I’m sure the big boxes will never be audited,” he said, “because they could turn this whole audit process on its head.”

“But what about politicians who often say that the State of Vermont is small-business friendly?” I asked.

McQuiggan could only laugh out loud.

Bisbee’s Hardware & Home Center, Waitsfield and Waterbury

During a brief conversation with John Wilson, who owns a hardware and home center store in Waitsfield and another hardware and home center store in Waterbury, he offered this terse remark about his encounter with the Vermont Department of Labor, saying: “We got audited.”

The employment issues at Bisbee’s were very much like ones at True Colors. It was all about subcontractors who were flooring installers. “We weren’t paying their unemployment tax,” Wilson said.

Then he continued, “We appealed the first decision. Our argument was that they were subcontractors. Why would we be paying their unemployment tax?” he asked.

But the ruling went against Bisbee’s when the Labor Department judged that the installers were employees, not subcontractors. The Labor Department went back three years and collected the unpaid unemployment taxes.

Reflecting on what happened, Wilson said he felt the Labor Department’s action wasn’t high on the “fairness scale.” He added, “Our subcontractors don’t work solely for us. We don’t pay their anything else. So now we do. We take it out of their payroll.”

Wilson remembers the Labor Department’s judgment costing him about $15,000. “They were targeting subcontractors,” Wilson said. “Hammering on small businesses—I just don’t understand that.”

Analysis and Questions

The Bridge published its first issue in December 1993. In the years that followed up until the Labor Department audit of August 2016, the way The Bridge classified its workers was never challenged by the Department. What’s more, the paper was never advised by its accountant during all those years that we needed to re-classify our workers.

Inasmuch as the Vermont Labor Department has declined to talk to The Bridge, this is what I surmise happened.

No one needs to be reminded of the September 11, 2001 terrorist attacks on the World Trade Center and other locations. Nor does anyone need to be reminded about the global banking meltdown of 2008‒2009 and its aftermath—the biggest financial crisis since the Great Depression of 1929.

The following paragraph is excerpted from the Vermont Department of Labor’s own website.

From the period of 2001 to 2010, Vermont’s Unemployment Insurance Trust Fund (UITF) annual debits exceeded their credits… and the (State of Vermont) went from having a positive UITF balance in 2001 of $300.4 million to a negative balance of $40.6 million in 2010. This required the (State of Vermont) to borrow money from the U.S. federal government and cover their debts from a Title XII loan. The loan amount increased to $77.7 million in 2011 due to shortages of cash in the first quarter of that year. Due to changes in the State’s UI laws and improved economic conditions, 2011 was net positive in that more cash was collected in contributions than was paid out in the form of UI benefits. This was the first time since 2001 that the UITF had experienced a net positive contribution-to-benefit ratio. The ending UITF net balance on December 31 2017 is estimated to be $381.7 million

Questions:

What truthfully is the story behind the Vermont Labor Department’s decision to redesign its worker classification system to crack down on small business owners for the purpose of increasing the dollar income to the Vermont Unemployment Trust Fund?

What was and is the Department’s thinking about applying an 18 percent interest rate on back payments to the state’s unemployment trust fund?

Why not identify the Vermont businesses that have been selected for the audit crackdown? Wouldn’t publishing a list of the audited businesses put to rest any suggestions that the audit crackdown essentially targeted small and vulnerable Vermont businesses?

How can Vermont voters and taxpayers and the general public know that the audit process has been carried out fairly and that the audits include the state itself and the state’s largest corporation—not just its small business owners?

How much money has the Labor Department spent as part of its audit crackdown? How much money has the Labor Department collected to date since the start of the crackdown?

What have been the specific steps that the Labor Department took to advise Vermont employers about changes to its worker classification rules or to inform accountants across the state and small business owners about the coming audit crackdown?

Was there a $500,000 federal grant made to the Vermont Department of Labor to pay for a media campaign to publicize the worker classification system and the Labor Department crackdown?  When was that money applied for?  When was that grant received?

How many businesses and small business owners have appealed rulings from the Department of Labor?  How many appeals have been denied?  How many appeals have been won?

Can the Vermont Department of Labor demonstrate that large Vermont corporations such as National Life or Cabot Cheese or the state’s largest banks or the state itself have been audited as part of the audit crackdown?

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