Taxing matters: North Carolina creates a new bureaucracy to counter employers trying to skip out on worker-related taxes.

• Author: Duckwall, Jane
• Position: NC TREND: Employment law

When tax documents began arriving in mailboxes in January and February Bradley Hicks' phone began ringing from workers expecting W-2 forms but instead opening 1099s. The war over "employee misclassification" has prompted class-action lawsuits nationally and, in North Carolina, Gov. Pat McCrory formed a new unit to crack down on employers who misidentify employees as independent contractors. The Employee Classification Section in the state Industrial Commission, headed by Hicks, emerged through an executive order in December.

One of the first to thank McCrory was Doug Burton, owner of Whitman Masonry in Raleigh, who has been focused on the issue since 2010, when his company was underbid by 25% on a job involving a small bank branch. It was a simple job, with each bidder likely paying the same amount for supplies. "To get beat that bad, it had to be on the labor side," Burton says. "The same people were beating me all the time. I knew they were subbing their labor out, going down the misclassified path."

Burton's experience illustrates the difficulty facing law-abiding companies that are repeatedly underbid by competitors who cut expenses by classifying workers as independent contractors. Such a designation saves business owners from paying unemployment taxes or withholding income taxes for those workers. In turn, employees miss out on workers' compensation insurance and unemployment benefits.

On the other side of the debate are ride-hailing rivals Uber and Lyft and other companies involved in the rapidly expanding "sharing economy." They depend on contract workers to provide rides, run errands, deliver meals, manage technology projects and handle hundreds of other tasks. Independent contracting benefits some workers by giving them more flexibility to set their own work schedules, while companies promote the strategy as a way to cut costs. The number of W-2s issued declined between 2010 and 2014, while the number of 1099s increased by 16 million, Bloomberg reported in December.

Advocates of tighter regulations say misclassification is costing state and federal governments millions of dollars. After Burton notified government agencies about the problem in his industry, he was featured in a series by Raleigh's News & Observer in 2012 and a follow-up report two years later. Violations in North Carolina's construction industry alone cost state and federal governments $467 million a year in taxes, according to the report, which based its estimate...