The state agency responsible for helping West Virginians find jobs and collect unemployment benefits is in an employment crunch of its own, according to a legislative audit.
In a yearlong examination of WorkForce West Virginia, legislative auditors found that employee misclassification was “rampant,” leading to a loss of $824,000 to $1.1 million in personal income tax revenue from 2014 to 2018.
During each of those years, the U.S. Department of Labor gave West Virginia a “fail” rating for its efforts in detecting employee misclassification. This refers to whether a worker is classified as an employee, with employers withholding taxes, or an independent contractor, who is responsible for their own taxes.
Part of the problem, according to the audit, is that WorkForce lacks its own auditors. The agency employed one full-time auditor in 2019, compared to seven in 2014. Low pay hinders recruitment.
Employee misclassification isn’t unique to West Virginia, one of 26 states and territories that received the “fail” rating in 2014 and 19 that received it in 2017.
The conclusions reached by legislative auditors were similar to steps that helped Louisiana, Vermont, Maryland and Minnesota improve their unemployment insurance audits, which are the investigations that uncover employee misclassification.
In 2000, the U.S. Department of Labor found that 10% to 30% of audited employers misclassified their workers.
WorkForce officials did not provide a formal written response to the report, but a notation in the document said the agency accepted it and officials are “working to implement the recommendations and working on a recruiting and hiring plan to increase staffing levels as recommended.”
Auditors said a posting for a tax examiner required candidates to have a bachelor’s degree with 24 hours in accounting for a job with a starting annual salary of $27,729. The requirements were similar for a tax and revenue auditor with a starting salary of $31,146, according to the report.
“Despite this, WorkForce must operate within the West Virginia Division of Personnel’s guidelines, which it says provide little opportunity for adjusting minimum job qualifications or augmenting starting salary levels,” according to the report.
Auditors recommended that WorkForce and the Division of Personnel officials work together to address the agency’s’ recruitment and retainment problems.
Auditors also found that WorkForce could better use existing data to identify more instances of employee misclassification. A three-step test identifies how much control someone has over the scope of their work, which, in turn, determines classification.
People classified as employees are entitled to protection under occupational and labor laws, insurance and other state benefits, including employers withholding state and federal taxes. Independent contractors bear the brunt of the work of collecting and paying taxes, and they don’t get certain legal protections while they’re working.
Legislative auditors found that, for a job that pays $60,000, an employer can save $6,396 annually if the worker is classified as an independent contractor, instead of an employee.
“While some worker misclassification is unintentional, many employers have an incentive to misclassify their workers in order to reduce their labor costs,” according to the report.
Auditors recommended that WorkForce begin routinely tracking and analyzing certain data, including the source of its audits, to better identify areas and industries of risk for employee misclassification.
Auditors also recommended that WorkForce and state lawmakers take more steps to penalize employers who misclassify their employees or fail to comply with audits. West Virginia employers who misclassify employees now are required only to pay the outstanding taxes. There is no penalty for employers who fail to cooperate with audits.
In at least 24 states, employers face penalties for misclassifying workers or failing to comply with audits, according to the report.
Auditors commended WorkForce officials for their cooperation during the audit, given the challenges of the COVID-19 pandemic. The audit began in August 2019 and continued through the early months of the pandemic, which “significantly altered the normal state of operations at WorkForce West Virginia” as the agency processed more than 200,000 claims.
“Despite the challenges presented to WorkForce over the past several months, the Legislative Auditor wants to acknowledge WorkForce for its continued cooperation and assistance in the audit process,” the report reads. “As such, the Legislative Auditor’s Office would like to commend WorkForce for its efforts in assisting the many West Virginians adversely affected by this pandemic, and extend a thanks for its continued cooperation and assistance with our audit process during these times.”