Payroll Fraud Crackdown Looms in Texas in 2013

Builders around the state will be paying extra close attention to developments in Austin as the 83rd Texas Legislature gavels into session later this month.  One of the industry's top concerns is the growing problem of worker misclassfication, also known as payroll fraud.

In the legislature's last session two years ago, a payroll fraud proposal from State Representative Joe Deshotel, D-Port Arthur, was unsuccessful, and labor leaders have been pushing for a solution for more than a decade only to consistently see their efforts fail.  But, the economic and political landscape has changed dramatically in just the last two years.

The trend we've noticed in our reporting at Construction Citizen is that this is no longer seen as a liberal or progressive cause.  More and more conservative republicans are now pushing to deal with misclassification because they see it as a rule of law issue.  In interview after interview, the theme that emerges is a sense of anger over the idea that honest business owners who don't cheat the system cannot compete against those who do.  The Texas Construction Association (TCA), for example, testified recently that honest contractors are consistently underbid by as much as 25% by companies that intentionally misclassify their workers.  The TCA says this is one of its “top 5” legislative issues this year.

The growing chorus may be too much for lawmakers to deny.

The Texas Workforce Commission, in an unprecedented move, endorsed legislation that would root out payroll fraud on government contracts.  The commission's staff will be working with the legislature.  State Senator John Carona, R-Dallas, who chairs the powerful Business and Commerce Committee, has instructed his staff to begin drafting legislation.  He told Construction Citizen that he will be “working with stakeholders, using what we’ve learned in many other states, to close the loopholes and restore fair competition to the construction industry.”

Meantime, industry leaders in North Texas are considering whether to support Carona's legislation.  The companies that have responded to our inquiries about whether they support legislation have generally said that they do.  One of them told me: “This misclassification activity puts a competitive disadvantage on those companies who fairly report their workers classifications correctly and fairly.  We do plan to follow the development of the legislation specifics and offer our input as opportunity arises.  We know that misclassification is a significant problem among subcontractors and ‘broker-type’ subcontractors in particular.”

Later this month, researchers at the University of Texas plan to release the findings of their study on payroll fraud and other problems in the construction industry.  Among their findings: More than 40% of construction workers in Texas are misclassified. From the research:

• Texas loses vital income.  Payroll fraud results in an estimated $54.5 million of lost tax dollars for the state unemployment insurance tax fund each year.
• $7.05 billion in construction wages go unreported to the Texas Workforce Commission each year.
• The federal government loses approximately $1.06 billion in federal payroll taxes for construction workers who are paid off the books.

When the entire study is released, we'll have all the details and in-depth analysis of what it all means, plus reactions from lawmakers.