TWC Takes a Stand on Payroll Fraud After Business Leaders Call it a “Cancer”

Leaders in the construction industry told the Texas Workforce Commission (TWC) that the state needs to get tough on companies that cheat the system by misclassifying their employees.  Construction Citizen has reported extensively on the problem, also known as payroll fraud, and now state leaders are starting to make moves toward correcting it.

During a hearing, Workforce Commissioner Ronny Congleton asked that the commission press the legislature to, in a general sense, crack down on misclassification.  “We need to bring the rule of law to this enormous underground economy in Texas,” Congleton said.  “We have to do something.  Doing nothing drives honest employers out of the business because they cannot compete.”

Commissioner Tom Pauken said he couldn’t go that far.  “This is a serious problem.  I respect the idea behind the proposal.  But, it’s so broad that it concerns me,” he said.

After raising that objection, Pauken was able to convince his fellow commissioners to join him in unanimously asking lawmakers to prohibit construction companies that win government contracts from misclassifying.  The specific proposal has yet to take shape, but Pauken said current law could be tweaked to require that any company doing work on a publicly funded construction project in Texas must properly classify its employees.  Pauken called it a “pilot program.”  That compromise was struck following impassioned testimony from construction industry leaders who said they can’t stay in business because other companies gain a competitive advantage by cheating.

Michael White, speaking for the Texas Construction Association (TCA), told the commissioners that he had heard from some TCA members they have sometimes been underbid by about 25 percent by companies who misclassify their workers as independent contractors.

Houston construction company owner Stan Marek told the commission that “our employees are employees.  We take good care of them.  Our industry has gravitated to people more and more not wanting employees.  This is rampant in our industry.  If it doesn’t change our company won’t able to survive.”

Marek, whose company is a specialty subcontractor, said the problem needs to be addressed through state and federal legislation.  He also said the Workforce Commission needs to do audits that are more thorough.  Marek pointed out that many companies do it “the right way” for only a portion of their workforce.  “They will do it right for 10 percent of their workers and then they have their 1099’s,” Marek said, referring to independent subcontractors.  “It is a cancer that is eating at the heart of our industry. It’s killing us.”

Following the Workforce Commission’s hearing, Marek said the pilot program proposed by Pauken “is a start.”  He continued:

“We hope the legislature can deal with the issue on public work and private work as well.  Construction wages are way too low to attract young people into the industry.  Until we fix this it’s going to stay that way.”  Because millions in revenue is now lost when companies cheat, Marek said taxpayers would be the winners if there was a real crackdown.  “For every million the state spends to enforce the law, they'll get $5 million back,” Marek said.

White, the TCA Vice President for Government Affairs, tells Construction Citizen that perhaps the state has, until now, underestimated the resources needed to combat misclassification.  “I believe the Texas Workforce Commission knows this is a big problem in the construction industry,” White said.  “I suspect it’s doing the best it can with the number of employees available for field audits and the very small penalties for law breakers.  It’s our belief that if a comprehensive misclassification law for construction were in place, the state would realize more revenue as a result of companies paying their rightful share of employment taxes.”

“This is a high priority issue for TCA.  It’s on the top of the list for a great number of our members,” White said.

The Workforce Commission continues to fine-tune its legislative agenda as lawmakers prepare to convene in January.