Bob Schwartz's business — a Vermont construction company that bills $2 million a year — appears to have little in common with Uber, the multinational car service valued at $40 billion. But they do share one thing: Both companies have attracted the scrutiny of the Vermont Department of Labor, which is questioning whether or not the independent contractors they hire are, in fact, employees.

The definition of "employee" is at the crux of a little-known but longstanding labor dispute in Vermont that flared up again on Monday, when state Auditor Doug Hoffer released a report critical of the state's efforts (PDF). It concluded that the agencies responsible for enforcing Vermont's labor laws aren't doing enough to stop companies from misclassifying their workers.

For years, labor advocates have been clamoring for a crackdown on companies that avoid paying unemployment insurance and workers' compensation by treating employees as independent contractors. In the process, employers also skip out on paying Social Security and Medicare taxes for those individuals.

"There's really no enforcement" in the construction industry, said Matt Durocher, business manager of Carpenters Local 1996. The building world relies heavily on subcontractors — its term for independent contractors hired by the general contractor, often to do specialized tasks such as laying tile or finish carpentry. Durocher and others say that the status quo deprives workers of their rights, undercuts businesses that are playing by the rules and robs the state of money it's owed.

Homebuilders have a different view, as evidenced by a poster on the door of Curtis Lumber in Burlington. Featuring the silhouettes of workmen standing against an American flag backdrop, the poster reads, "Stand with us. Stop the audits." The Home Builders & Remodelers associations of northern and southern Vermont started distributing the posters last spring. The builders contend that the labor department has been auditing them aggressively in recent years, enforcing an impossible-to-understand policy that defines almost everyone as an employee.

"They are killing the entrepreneurial spirit and breaking our backs," said Schwartz, who is challenging the department's determination that two subcontractors who worked for his company should have been run through the payroll as employees.

The debate over "misclassification" is heating up across the country. The Obama administration has stepped up efforts to address it, and, during a July speech, Democratic presidential candidate Hillary Clinton also pledged to "crack down on bosses who exploit employees by misclassifying them as contractors." In an op-ed earlier this year, acclaimed economist Robert Reich declared, "The rise of 'independent contractors' is the most significant legal trend in the American workforce — contributing directly to low pay, irregular hours and job insecurity."

The issue has particular significance in Vermont, a place where many people moonlight to make ends meet and there's a proud, labor-friendly tradition. Is the state striking the right balance between nurturing a flexible economy while still protecting its workers?

"Confusing" is how many describe Vermont's legal framework for determining who is or isn't an employee. Even Annie Noonan, Vermont's commissioner of labor, acknowledged that classifying employees can be complicated. Federal and state guidelines aren't entirely compatible. The Internal Revenue Service might consider a person an independent contractor while the state deems that person an employee. In addition, Vermont has separate tests for assessing unemployment insurance and workers' compensation.

The latter is required if the employer has the "right to control" the worker — by dictating hours, for example — and if the tasks being performed are "an integral part of the employer's regular business."

The former is not required if contractors are "free from control of direction" while on the job; perform work that falls outside the usual course of business; and to have a bona fide business of their own.

The nature of certain industries — including construction and delivery services — lends itself to noncommittal employment relationships. Schwartz has run Great Northern Construction in Burlington for 41 years. He employs six people full time, but because business is unpredictable, he also relies on subcontractors to come in when he's got more work than his own half dozen can handle.

When the labor department audited him more than a year ago, it determined that he owed $20,000 for two independent contractors it considered employees. His voice rising in indignation, Schwartz noted that he's shelled out $15,000 in legal fees to challenge the finding. He had no inkling that he'd been running afoul of state labor laws, which he criticizes as being subjective and convoluted. "We're not criminals," he said. "We're honest businessmen who think we're playing by the rules."

David Hill feels the same. The 65-year-old South Woodstock resident got his start in the building business four decades ago, specializing in reconstructing derelict barns. He and his wife are the only employees of a homebuilding company. Subcontractors are their lifeblood, Hill said, coming in to excavate, sheetrock and do the plumbing on jobs. But the Hills said they have always been careful to follow the rules.

Doing so got trickier after the 2008 Vermont Supreme Court Chatham Woods decision, which determined that a real-estate development company should have put three subcontractors — two framers and one roofer — on its worker's comp policy, even though all three had their own businesses. Since state law exempts business owners from covering themselves with worker's comp insurance, Chatham Woods made the case that those exemptions should also apply to its company when it hired the subcontractors. They also argued that because they didn't normally build projects, framing and roofing fell outside of the company's normal course of business. The court ruled against the developers, requiring them to pay for the policies. 

As in Schwartz's case, a labor department auditor showed up unannounced at one of Hill's job sites in 2013. Two years later, the audit drags on — the department still hasn't issued a ruling. In the meantime, he's calculated that he could be on the hook for hundreds of thousands of dollars if his contractors are found to be employees.

Hoffer's audit makes it clear that Hill isn't the only one awaiting judgment.

After reviewing records in the workers' compensation division, the state auditor found that 30 investigations initiated in 2011 haven't been finished and 134 "active" cases were assigned to investigators who no longer work for the labor department. Noonan explained that the department was understaffed for several years and noted that it recently filled all four positions for workers' compensation investigators.

Hoffer's report also found that the data the labor department collects — including the number of audits it conducts and the number of misclassified workers found — are "unreliable." And it chided the department for conducting most of its audits randomly, rather than targeting certain sectors or pursuing companies with suspicious tax filing patterns.

Another fail unearthed by the audit: A 2010 law required the department to levy penalties on companies that have shortchanged the unemployment insurance fund, above and beyond the amount they "owe." But the department hasn't been enforcing that. The reason? Noonan said the department needs to create rules first, including an appeals process, which requires legislative approval. The audit, however, notes that five years have elapsed since the legislation took effect. The department did collect some workers' comp penalties, but the audit found its efforts to be sporadic and poorly documented.

Michael Sirotkin of South Burlington has crusaded against misclassification for years, first as a lobbyist for unions and now as a Democratic state senator. When asked about the labor department's enforcement, he closed his eyes and shook his head, then pulled out a list of more than a dozen legal changes passed in recent years to beef it up.

"The state is losing millions of dollars of revenues," he said, noting that when businesses fail to pay into the unemployment insurance fund, rates rise for the ones that do. Additionally, when employers pay taxes on behalf of employees, they pay more into state coffers than when independent contractors file individually.

One of the statutory changes on Sirotkin's list required that state agencies confirm that the contractors they work with are following the rules. Hoffer's audit concluded that "gaps remain" here, too, leaving the state "at risk of contracting with vendors that have violated employment law."

In September 2012, Gov. Peter Shumlin signed an executive order convening a task force of state officials to tackle misclassification. It was required to meet every other month; Hoffer found that it stopped meeting for a two-year period, from the end of June 2013 until this July. Noonan said it's resumed, and there's plenty of intra-agency communication going on outside the conference room.

Addressing the problem "has been a challenge," Noonan conceded. "This is just literally one of those issues where you make no one happy," she noted. "In the past year it's become much more polarizing than it was even three or four years ago."

Expect that trend to continue. The rise of the so-called sharing economy has further complicated the question of who counts as an employee. Uber, an on-demand car service that connects drivers with passengers via an app, is among a number of new companies that depend on independent contractors in Vermont. They make the case that the traditional employee-employer model is outdated, and their contractors prefer flexibility. The financial advantages for employers are obvious: According to Sirotkin, studies have shown that businesses save up to 30 percent on labor expenses by classifying workers as independent contractors rather than employees.

Under the auspices of the Working Vermonters Caucus, 41 Vermont lawmakers sent a letter to Noonan on August 20 suggesting something she was already well aware of — that Uber may be violating the state's unemployment insurance and workers' compensation laws. The labor department has already spent months investigating the employment status of Uber drivers.

The letter from labor-friendly lawmakers urged the department not to be cowed by the company's resources: "No matter how many political donations or effective the lobbying team Uber brings to Montpelier, all of our working people and business leaders deserve to know that the law is applied evenly and without prejudice," it read.

An Uber spokesperson said the company, which is embroiled in similar legal battles nationwide, wouldn't comment on the ongoing investigation. But she noted that Uber continues to believe its drivers are properly classified under state law.

Uber won't be the only entity urging lawmakers to make changes to the state's labor laws. "Clearly our economy is changing," said Kendal Melvin of the Vermont Chamber of Commerce. "Employees want to be able to have flexibility, and they want to be able to work for themselves." As a result of state labor laws, "In Vermont, it's hard to do that," she added.

David Badji, 26, moved from Senegal to Winooski several years ago. He recently quit his job at the University of Vermont Medical Center — and forwent the benefits that came with it — to drive for Uber. "You are your own boss," he explained while chauffeuring a reporter in his blue Mazda.

Another Uber driver told Seven Days that he supplements his pharmaceutical sales job by driving four to 15 hours a week for Uber.

Labor advocates contend that regardless of whether employees prefer the arrangement, there's good reason to enforce the current laws. Sirotkin pointed out that when people lack job benefits, taxpayers often end up picking up the tab for their expenses such as hospital bills.

With some people agitating for greater enforcement and others arguing for a more flexible approach, is there any chance of finding common ground? Years of negotiations, led by the labor department, have failed to produce a compromise. But both sides said they're willing to try again.

Said Durocher of the carpenters' union: "I'm not against sitting in a room and figuring out how to make it simple."