Editor’s note: In April, Professional Janitorial Services Executive Don Dyer delivered this powerful testimony to the Texas House Business and Industry Committee, which is studying what more lawmakers might need to do to combat the problem. While we've repeatedly covered the issue and how it impacts construction, Dyer's testimony shed new light on just how prevalent this problem is in another industry. Below, we're proud to share his testimony in full for our readers.
Our company has operated in the Texas janitorial industry since 1986 and we hold offices in Austin, Houston, San Antonio, El Paso, and Corpus Christi. In our 28 years of existence we have watched the Texas economy grow by leaps and bounds and have enjoyed considerable success as we grew from a small company with a handful of cleaners to now over 2500 janitorial employees. We attribute our success with providing superior service to our clients and treating our employees in an ethical and respectable manner. However, during this same time we have also seen an alarming trend in the janitorial industry regarding the misclassification and unethical treatment of employees.
What is Employee Misclassification?
Certain corporations have chosen to cut corners and pad their profits by misclassifying their workers as “contractors” when they should have been classified as “employees”. Employee misclassification in our state is explicitly against the law, yet because of weak enforcement mechanisms there are virtually no tangible consequences for violating the law. This oversight on the part of our government has opened the doors to a whole host of unethical practices including wage theft, tax evasion, and employee exploitation.
Let us be clear, there are legitimate cases when a contractor/contractee relationship can exist, but with alarming frequency this relationship is simply contrived and doesn’t exist in economic reality. The U.S. Department of Labor and the U.S. Supreme Court hold the following factors to be significant when determining whether a worker is an employee or a contractor.
- The extent to which the services rendered are an integral part of the principal's business.
- The permanency of the relationship.
- The amount of the alleged contractor's investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor's opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
In each of these tests a company’s janitorial workers would almost always fall underneath the classification of “employees” rather than “contractors”. Yet companies in our industry will routinely misclassify their employees as “contractors” even though legally they should be “employees”. For additional reading please see the 20 factor comparative test developed by the IRS and currently used by the Texas Workforce Commission.
Just as common is the “push down effect” when a janitorial company claims that all of its work is performed by properly classified employees, but then the job is subbed out to a contracting company who in turn claims that all of their workers are properly classified employees. The work is then subbed out yet again to another contracting company that claims each of their workers are properly classified as employees, however in this case they are blatantly not classified as employees like they legally should be, but rather illegally classified as “contractors”.
Through all of this maneuvering the first janitorial company that won the original contract has pushed the responsibility of taxes, overtime, safety training, and accident insurance “down the line” and claims that their hands are clean, even though they know what’s really going on behind the scenes.
Employee misclassification is widespread in our industry and has been left virtually unchecked by the law. The gravity of this situation is severe and what follows below are the negative impacts of this illegal activity.
1. Ethical Companies are Driven Out of Business
Unethical companies that operate illegally are able to keep their expenses artificially low. The Maintenance Cooperation Trust Fund in California estimates that unethical janitorial companies in their state enjoy a 40% cost advantage while Cornell University reported last year that unethical companies in New York that intentionally engaged in worker misclassification were able to save over 30% of their payroll costs. We can confirm that this trend exists in Texas as well.
Law-abiding companies that classify their employees legally simply can’t match the prices of illegal operators and are slowly being driven out of business because they can’t bid low enough to win contracts. Needless to say, there is enormous pressure for law-abiding companies to cave in and begin misclassifying their employees as well when they see their competitors winning contracts by breaking the law without legal consequences.
2. Taxes are Never Paid
When employees are classified as “employees” like the law requires then a company is required to withhold federal income taxes, Social Security payments, Medicare payments, and unemployment taxes throughout the year. But every year, illegal operators forego any type of withholding and instead illegally issue their misclassified employees 1099s instead of W2s.
The misclassified employee is then expected to file and pay their own taxes; however, since many of the workers are undocumented, legally uneducated, and live in a cash economy a vast number of them don’t, and millions of dollars of tax revenue are lost every year. In our estimation well over $55 million in taxes and insurance go unpaid in the Dallas janitorial industry alone. This doesn’t even address when money is paid under the table (a very common practice) and never reported on a 1099.
3. Employees are Exploited
Unethical cleaning contractors explicitly seek out undocumented workers since they are the easiest to exploit and intimidate. Contractors will hire these workers and illegally misclassify them as “independent contractors”, bypassing laws and protections meant to protect employees.
These undocumented workers live in the cash economy and are paid well below the minimum wage and are frequently the victims of wage theft. When the workers complain to their employers about their unpaid wages, the employer responds by threatening to fire them or turn them into the authorities for being undocumented. Most of the workers are unaware of their legal options, are afraid to turn to seek legal help, and need to keep providing for their families, so they continue being exploited.
4. Society is Hurt
Exploited employees populate the lowest income bracket in our economy. When their promised wages aren’t paid a vicious cycle occurs where exploited employees are often forced to acquire debt for basic needs such as rent, food, transportation, and medical needs. Other important needs such as literacy and educational improvement are placed on the backburner as employees are driven into a subsistence lifestyle.
The cumulative effect of increased debt, reduced mobility, and lack of education forces the employee to then seek a second full-time job, meaning that they spend even less time with their families and children. This in turn harms society when children grow up with absent parents and increases levels of violence, crime, and recidivism in our state.
5. Taxpayers and Honest Companies Shoulder Burden
The same companies that choose to illegally misclassify their employees typically choose to forego workers’ compensation or any type of employee insurance. When an employee is injured on the job and rushed to the hospital, the company refuses to pay the bills and claims legal immunity since the employee was classified as a “contractor”.
The employee is then held liable for the medical expenses and any ongoing medical therapy, but more often than not simply can’t make the payments, and in the end the hospital ends up passing on the uncompensated medical expenses to Texas taxpayers. Hospitals then charge more to paying patients whose insurance companies in turn are forced to raise the premiums on ethical companies who carry health insurance.
6. Children Never Receive Child Support
When an employee is classified properly as an “employee” companies will frequently receive orders to withhold part of the employee’s wages for child support. However, unethical companies that illegally misclassify their employees pass this responsibility on to the individual employee who then may not make their required child support payments.
Furthermore, workers who owe child support are more likely to seek a job with a company that will illegally misclassify them as “contractors”, knowing that they’ll be able to keep more of their wages. As a result, the children that would otherwise benefit from the child support payments are neglected because of the irresponsibility and complicit behavior of unethical companies.
While this report at least gives you some insight into the issues faced by ethical companies in the janitorial industry, this doesn’t even begin to scratch the surface of other industries such as construction, hotels, restaurants, HVAC, and landscaping where employee misclassification, wage theft, and exploitation is common. A government that turns a blind eye to infractions of the law fosters a culture that ignores the rule of law and endangers society. In the words of Martin Luther King Jr., “Injustice anywhere is a threat to justice everywhere.” It is our hope that the committee will seriously consider the harmful nature of employee misclassification and take action to end this illegal activity before ethical companies are either driven out of business or forced to misclassify their employees as a means of survival.