Payroll fraud (also called worker misclassification and workplace fraud) is the illegal practice of designating an employee as a "1099 worker" or an independent contractor. Unscrupulous employers do this to avoid paying payroll taxes, unemployment tax, or workers’ compensation insurance and are therefore able to submit lower bids for projects, undercutting responsible contractors. Several states have already passed laws to penalize those who cheat workers and taxing agencies in this way, and two bills are currently being considered which would provide federal legislation to end this practice and that of wage theft. They are The Fair Playing Field Act, introduced by Senator Kerry and a number of co-sponsors and The Employee Misclassification Prevention Act.

Editor’s note: On Tuesday, the Texas House will consider what more needs to be done on the issue of worker misclassification. President and CEO of BRI Roofing in Fort Worth is very concerned about the practice, which has been called a “cancer” in the construction industry. We are pleased to publish his open letter to the members of the committee looking into it.

Honorable members of the Texas House Committee on Business and Industry,

I am writing today as a business owner concerned about a serious challenge facing not only my industry, but society at large. The problem is so immense that it will not be fixed without ethical companies as well as government joining together to stop the fraud known simply as “worker misclassification.” I am very glad to see your committee is considering what to do about the problem. Below, you will see my thoughts as to the real risk associated with keeping the status quo. The issue is complex and I am providing you with many details to consider. But, the bottom line is that worker misclassification is fraud, plain and simple. Read more » about An open letter to Texas Lawmakers on Worker Misclassification

A Texas House Committee has scheduled a hearing on the issue of worker misclassification and what more the state may need to do to combat the problem that is particularly rampant in the construction industry.  The House Business and Industry Committee will take testimony on the implementation of a limited crackdown that was signed into law by Governor Rick Perry last year.  The hearing is slated for Tuesday, April 22 at the state capitol.

The official announcement of the public hearing says that the panel of lawmakers will be looking into “the issue of misclassifying employees as independent contractors on workers, employers, income tax withholding, and the unemployment insurance system.  And the review of current statutory deterrents, including those required by HB 2015.”  That bill just took effect on the first of this year.

As our readers are well aware, the practice of employee misclassification happens when companies pretend their workers are independent subcontractors when, by law, those workers should be properly classified as employees.   Read more » about Misclassification Hearing is Set in the Texas House

An unfortunate reality of the industry we cover is that there are many instances of worker abuse. We have documented much of this on Construction Citizen over the years.  Terrible working conditions, worker misclassification, lack of health insurance and workers’ compensation insurance, denial of overtime pay and other problems honestly keep me up at night.  But, I was only fairly recently alerted to just how prevalent human trafficking is in construction.

Houston is ground zero for human trafficking in the United States and for that reason, the American Jewish Committee (AJC) Bridging America Task Force will present its third immigration summit on March 18 at 8 am at Rice University.   Read more » about Immigration Summit in Houston to Focus on Human Trafficking

Now that the state is moving forward with a targeted crackdown on the practice of worker misclassification, which some in the construction industry have called “a cancer,” lawmakers are going to work through the summer to figure out what more they can do when they reconvene in a regular session in 2015.

As you may recall, the Texas Legislature in 2013 passed a bill to root out misclassification on public works projects.  While many see that as a step in the right direction, it doesn't go nearly far enough to address the problem.  As our readers well know, worker misclassification happens when a company pretends its employees are independent subcontractors when by law the workers qualify as employees and therefore should receive benefits and have their taxes deducted and matched.  While there are many legitimate uses for subcontractors, the abuse happens when a company does this with the intent of skirting the law and avoiding payroll taxes.

Texas House Speaker Joe Straus, R-San Antonio, has now instructed House members to “examine the issue of misclassifying employees as independent contractors [and the effect this practice has] on workers, employers, income tax withholding, and the unemployment insurance system.  Review current statutory deterrents, including those required by HB 2015 (83R), and make recommendations for changes if necessary.”   Read more » about Texas House to Study What More Should be Done on Worker Misclassification

Our readers know all too well that the problem of payroll fraud, or worker misclassification, has become a cancer for the construction industry and that quite a few states have made moves to try to deal with the problem.  Now, it appears there may be a legitimate effort in Washington to try to deal with it at a federal level.

From McClatchy News:

“Senator Bob Casey, D-PA, estimates the payroll theft has cost taxpayers tens of billions of dollars.  He introduced legislation November 12 that would make misclassification a violation of the Fair Labor Standards Act, would assign penalties for each case of payroll fraud and would create rights for employees to know what their status is and require employers tell workers their status.  ‘I think a lot of people would be stunned to learn that under current federal law it is not a violation of the Fair Labor Standards Act to engage in this kind of misclassification, this kind of fraud,’ Casey said in an interview after the hearing.  ‘It should be illegal and it’s unfortunately not unless you violate some other law.’”

Casey and other lawmakers last week heard from business owners and workers who have been harmed by the practice during a Senate hearing.   Read more » about Some in Congress Push for Misclassification Crackdown

One contractor in Arizona has had enough of what he and others say is “stealing middle class jobs” in his state.  John Jackson has become one of the most aggressive worker misclassification watchdogs we've seen so far – actually walking right onto jobsites and asking people how they get paid.  Jackson told me he's been doing this for about two years and he's now really starting to get attention and results.  The home builders are “on the run”, as he put it.  When confronted, they refuse to answer questions about the practice of misclassifying their workers to avoid payroll taxes and to underbid Jackson and other ethical contractors.

Jackson and his aggressive tactics were first featured on the NBC television affiliate in Phoenix earlier this year, which we highlighted here on Construction Citizen.   Read more » about Misclassification Watchdog Emerges in Arizona [VIDEOS]

To some in construction, avoiding payroll taxes by paying workers as independent subcontractors is just the way to do business.  But, as we've repeatedly noted, it is illegal to do that when the person you're paying meets the government's definition of an employee.  The intentional misclassification of workers is also one of the largely unseen causes for the degradation of the American middle class because it undermines the employer-employee relationship in a way that leads companies to simply throw people away when they are through with them.  This problem didn't reach crisis levels overnight, and it won't be solved quickly, either.  But the tide is starting to turn.

The federal government has largely been on the sidelines when it comes to enforcement, so what we've seen is more and more states making moves to crack down on the practice.  Texas is gearing up to root out worker misclassification on taxpayer subsidized projects, and other states are pursuing bolder policies.  A recent report by Bloomberg News declares that “States from New York to California are taking steps to crack down on employers who improperly classify their workers or fail to declare their income.”  From the Bloomberg report:   Read more » about Worker Misclassification is Fraud – Plain and Simple

Efforts to crack down on worker misclassification in Texas took a step forward this year with the passage of a targeted crackdown on the practice that some have gone so far as to call “organized crime”.  But, as we've reported, there is much more to do as far as implementation of the law passed by the legislature and signed by Governor Rick Perry.  Many players in commercial construction are hopeful that when the legislature convenes again in 2015, a broader misclassification crackdown like the one pushed this year by Senator John Carona, R-Dallas, can become reality.

Meantime in Arizona, one man in particular has had enough and he's become an aggressive watchdog on what he and others are now calling “illegal labor”.   Read more » about Worker Misclassification in Arizona: “Business Off the Books”