There is growing anger across the nation about the about the cancer of worker misclassification in the construction industry. Why are more and more political leaders, thought leaders, and others calling it a “scam” and saying that something needs to be done quickly to deal with these cheaters?
Well, as Supreme Court Justice Louis Brandeis famously intoned: “Sunlight is the best disinfectant.” That’s the way most people know the quote. The entire quote is this: “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”
The steady attention Construction Citizen has given this issue has helped inspire media outlets like the Dallas Morning News to call for a crackdown. Other organizations like McClatchy Newspapers have now joined with us to highlight the problem and share with their readers the truth that taxpayers, workers, and ethical construction companies are all suffering while the cheaters make off like the bandits they are.
The Lexington Herald-Leader in Kentucky is the latest newspaper to take a strong stand. Below, we are proud to share with you an editorial they originally published in their Sunday edition. Reprinted with permission. -SB
End 'independent contractor' tax dodge by construction companies
Sad as it is to say, tax scams have been going steady for a long time. Probably as long as there have been tax expenditures.
And when Uncle Sam is doing the spending, some scams can reach epic proportions. Just think of the days when the Defense Department spent $436 for a hammer and $640 for a toilet seat.
Epic seems an apt term for the scam too many construction companies perpetrated on the nation's taxpayers and their own workers while benefiting from the federal stimulus enacted in 2009, as described in McClatchy's "Contract to Cheat" investigation that appeared in the Herald-Leader the past week. The stories are the product of a yearlong study of payroll records for federal housing projects in 28 states.
Kentucky was not one of those states, but concerns about increased misclassification and inadequate regulation of the practice have been raised during recent legislative sessions and during discussions on state tax reform.
The McClatchy study found rampant misclassification of construction workers as “independent contractors.” Using this one simple tactic, the scamming companies avoided paying income and payroll taxes, as well as the unemployment taxes and workers' compensation insurance that would serve as a safety net for their “independent contractors.”
Freed of these costs, they could underbid honest construction companies and still reap hefty profits. Some went further by violating prevailing wage laws and demanding kickbacks from workers.
With the burden for reporting and paying taxes shifted to the “independent contractors,” it should surprise no one that not all the appropriate taxes got reported or paid. This was particularly true in Southern states, where the study found nearly 40 percent of workers on public projects were misclassified.
A McClatchy analysis found nearly $400 million in tax revenue is lost annually in Florida due to misclassification. For North Carolina, the annual loss is nearly $500 million. In Texas, it's $1.2 billion.
If 20 percent of the nation's 10 million construction workers are misclassified, McClatchy estimates the annual loss in federal income, payroll and unemployment taxes exceeds $8.5 billion.
Perhaps more alarming than the scamming is the fact the same feds who have been cracking the whip on misclassification in private-sector contracts basically ignored the issue when the public's money was involved.
Regulators did nothing as companies with a known record of misclassification got contract after contract.
Which brings up one more noteworthy number: According to the Government Accountability Office, at least $24 billion in stimulus money went to companies owing more than $750 million in back federal taxes.
We hope it is not whistling in the wind to expect the "Contract to Cheat" series will prompt Congress and President Barack Obama's administration to take a good, long look at who in the government screwed up on enforcing the law on public contracts as firmly as they've been enforcing it in the private sector. And prompt federal and state prosecutors to take appropriate action where clearly criminal offenses occurred.
Going forward, though, a couple of corrective actions seem appropriate at the federal level and for states:
First, federal and state agencies should stop accepting certified payrolls from contractors who don't withhold taxes for their workers.
Second, get proactive in making misclassification costly to contractors, the way New York and Illinois have done in recent years.
In New York, for instance, a 2010 law makes it a presumption that workers in the construction industry are employees, not “independent contractors.”
And the burden to prove otherwise is on the company. Violations of the law can lead to penalties up to $5,000 per misclassified employee. Illinois has taken a similarly strong stand.
And while the McClatchy study found a misclassification rate of nearly 40 percent on public projects in Southern states, where “right to work” laws are popular, it found no instances in the dozens of projects reviewed in New York and Illinois, both of which have a strong union presence.
Perhaps there's a lesson there for taxpayers tired of being ripped off by scammers.