Misclassification of Workers and Cost of Surety Bonds Debated


The second meeting of the Interim Study Committee on Employment and Labor took place recently. Committee members discussed a proposal offered by Sen. Karen Tallian (D-Portage) that would address some concerns related to the misclassification of workers specific to the construction industry. Her proposal would create a payroll fraud task force that would identify those commercial and industrial construction projects in which payroll fraud or employee misclassification is suspected of occurring.

The task force would assess investigative and enforcement methods. Additionally, the group would supervise and direct an investigator hired by the Department of Labor (DOL) and assigned to the task force to conduct investigations and enforcement activities.

The task force would consist of the commissioners from the DOL, the Department of Workforce Development (DWD) and the Department of Revenue (DOR), plus the chair of the Worker’s Comp Board. A task force fund would be created as result of penalties and interest assessed against employers that would be used to administer the investigations. Most of the public did not have access to a copy of the proposal until after the hearing.

The DOL testified that there was already a mechanism for fraud. A web site hosted by the DOL allows for online reporting of any suspected misclassification of workers. The information gets forwarded to the DOR, DWD and the Worker’s Comp board; these agencies then handle each tip accordingly, with all information remaining confidential. It was estimated that there are two to four reports per month. Committee Chair Rep. Doug Gutwein (R-Francesville) did not allow the proposal to be included in the recommendation report of the committee. It is anticipated that Sen. Tallian will draft similar legislation in the upcoming legislative session.

The committee also heard testimony from the Surety & Fidelity Association of America (SFAA) on the pricing of surety bonds on public works projects. As a licensed rating or advisory organization for the states, SFAA develops a manual of rating rules for surety bonds that their members may adopt. Bond companies may either file the rates advised by SFAA or file their own. SFAA serves as the statistical agent in Indiana for reporting premium and loss data to the Department of Insurance. The premium for a bond is based upon the construction contract. The surety’s assessment must take into account the size and scope of the underlying obligation and is designed to prevent defaults on construction projects.

The cost of surety bonds on public work projects is generally between .5% and 3% of the amount of the construction contract. From 2001 to 2014 the surety industry collected $380 million in premiums and assumed a total exposure of about $38 billion. Approximately $85.4 million was incurred in direct losses on those bonds during the same period. Representative Bob Morris (R-Fort Wayne) suggested that Indiana might be able to self-insure on surety bonds and come out financially a little better. No action was taking on his suggestion.

Leave a Reply

Your email address will not be published. Required fields are marked *