On Tuesday, the Texas House will consider what more needs to be done on the issue of worker misclassification. Mike Beeter, 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.
What’s the RISK??
Employee or Independent Contractor
ACTION: A construction manager signs a contract with a primary roofing contractor (1st Tier) to provide labor, materials, equipment and supplies for the construction of a public project driven by wage rates, worker’s compensation coverage, general liability insurance, auto insurance and umbrella insurance for all on site activity. The contract also calls for the primary roofing contractor to abide by all Federal and State Laws, OSHA regulations etc. The primary roofing contractor is to Indemnify and hold harmless the construction manager and owner, architect etc. for all claims as a result of actions of the primary (1st Tier) roofing contractor.
REACTION: The primary roofing contractor hires a Labor Only Independent Contractor (2nd Tier) to perform the actual on site work.
PRIMARY RISK #1:
Did the primary roofing contractor execute a legal binding agreement for the site specific work to be accomplished for the project and did the primary roofing contractor “push down” all requirements of the contract that the primary roofing contractor has with the Construction Manager.
More often than not, the primary roofing contractor does not ensure that a formal written contract is executed with a labor only Independent Contractor (making the terms of the contract in the Action clause above a requirement of the Independent Contractor contract), thus, in these cases the primary contractor can be found to have violated the statute that determines whether the actual workers on the project site are employees or Independent Contractors (referred as Employee misclassification). The construction manager is at risk of a shut down due to a TWC investigation (Tip line established with Construction Citizen). Depending on the length of the TWC investigation, the construction manager could force the primary roofing contractor into damages as a result of the delay since the primary roofing contractor is indemnifying the construction manager for his own actions. The Independent Contractor, as a result, “walks off the job”. Now the primary roofing contractor is adding to his damages that the construction manager is holding him accountable for in the delay of the project.
- Is a lower price on bid day really worth the risk of delay on the project??
PRIMARY RISK #2:
Since there is no contract between the primary roofing contractor and the Independent Contractor, what happens to the wage rate requirements of the project??
If the Independent Contractor operates with employees, then he is obligated to follow the wage rate requirements of the project. If the Independent Contractor hires an additional 10 Independent Contractors to perform the work than 9 times out of 10 the wage rate requirements are breached. Again, a TWC complaint through the proper channels (i.e. Construction Citizen) is the only way for anyone to determine whether the wage rates are actually being paid to the people who are actually doing the work on the project site. Most “public” projects do not require certified payroll and even if they did, the cheating contractors have no problem “forging” these documents. Again, if an investigation takes place then it can become a lengthy process, forcing the construction manager to withhold damages for delay.
- Is a lower price on bid day really worth the risk of delay on the project??
PRIMARY RISK #3:
Since there is no contract between the primary roofing contractor and the Independent Contractor, what happens to the worker’s compensation coverage for the worker’s who are actually performing the work on site??
In most cases, the workers associated with a labor only Independent Contractor are also Independent Contractors themselves (not being paid as an employee) but being paid a production rate. As a result, 9 times out of 10, there is NO worker’s compensation coverage for the workers actually performing the work on the project when the primary roofing contractor utilizes this 2nd tier method of doing the work. There is a game that is played with regard to this issue in that the primary roofing contractor will say that the workers are covered under his policy but then his policy does not have a “subcontractor” aspect to the premium being paid for the insurance. Even if the 2nd tier labor only contractor was covered by the primary roofing contractor, then the primary roofing contractor is basically confirming that he is in violation of employee misclassification laws on public projects. Again, a TWC complaint through the proper channels (i.e. Construction Citizen) is the only effective way to “catch” this abuse with regards to worker’s compensation insurance fraud on public projects.
- Is a lower price on bid day really worth the risk on the project??
Primary RISK #4:
If it is determined that no workers compensation insurance exists for the workers actually performing the work on site, then what happens in the event of a worker accident or a death??
In the event of an accident of an Independent Contractor worker, the involved worker typically ends up at a public hospital facility. When the worker is faced with medical bills that he cannot pay, he will most often times just disappear and let the taxpayers foot the bill (this is what happens if the worker is not legally authorized to work in the United States). If the injured worker is authorized to work, then the worker could get an attorney & sue the main Independent Contractor that was paying him. The main independent contractor then tells the worker that he does not have any insurance to cover his injuries and that he does not have to cover his injuries because the worker is his own boss as a 3rd Tier Independent Contractor. The workers attorney then sues the primary roofing contractor and possibly the construction manager at the same time. The construction manager turns the defense of his suit over to the primary roofing contractor because the primary roofing contractor is indemnifying and holding harmless the construction manager for any claims arising out of the work of the primary roofing contractor. Now the primary roofing contractor has to prove that he is not responsible. The attorneys begin to look into the contractual relationships between the construction manager and the primary roofing contractor as well as the contractual relationship between the primary roofing contractor and the 2nd tier labor only Independent Contractor and then also look into the relationship between the 2nd Tier Labor only Independent Contractor and the worker who is a 3rd Tier Independent Contractor. (Hopefully you can see now when this issue of misclassification becomes such a problem the further down the line Independent Contractors are used.) Soon it is discovered that the primary roofing contractor executed a contract with the construction manager to have in place workers compensation insurance. Secondly, it is discovered that the primary roofing contractor does not have a written contract with the 2nd tier Independent Contractor that carries the same terms and conditions of the contract that the primary roofing contractor has with the construction manager. Thirdly, it is discovered that the primary roofing contractor “assigned” a portion of the work to a 2nd tier party without disclosing the assignment to the construction manager. Fourth, it is discovered that the primary roofing contractor does not have sufficient workers compensation insurance coverage and/or is “covering” the workers compensation coverage of the 2nd tier Independent Contractor. Lastly, it is determined that the 2nd Tier Labor Only Independent Contractor has no agreement in place with the 3rd Tier Independent Worker. Either way, the primary roofing contractor is either breaking the law with regard to employee misclassification or workers compensation breach of contract. The primary roofing contractor is now faced with a dilemma as a result of these findings and could be found 100% responsible for the medical, wage and indemnity issues associated with an injury or death on the project. The primary roofing contractor has breached several conditions of the contract with the construction manager and is now potentially facing a multi-figure civil and/or criminal lawsuit. The primary roofing contractor disappears or files for bankruptcy, all work on the project ceases, OSHA is investigating for negligence (in the event of a death). The situation becomes too much for the Labor Only Independent Contractor (2nd Tier) to deal with as all sides are coming after him/her.
· Is the LOW price on bid day really worth the risk??
Now let’s say that the primary roofing contractor had a payment and performance bond to the construction manager on the public project. The bonding company steps in after the broker contractor goes into default as a result of the overwhelming issues. The bonding company quickly gets a handle on the issues as a result of pressure from the construction manager and the bonding company categorically denies the claim as a result of the primary roofing contractor breaching several aspects of the contractual relationship with the construction manager. It is all squarely on the primary roofing contractor who has still not been found.
The construction manager now has no choice but to call in a second primary roofing contractor in order to just keep the project going. He will have to seek damages against the original primary roofing contractor later down the road as he cannot continue to have the project delayed under the circumstances. The construction manager has to come out of pocket six figures over and above what he alreadycontracted for to get the project back on schedule and completed. The construction manager would then have to spend another six figures to go after the primary roofing contractor who has still not resurfaced.
So, let’s add up the winners and losers as a result of the bid day decision by the Owner or Construction Manager to use this primary roofing contractor who they knew nothing about other than he has a great price on bid day.
- In the end, the Construction Manager loses a minimum of six figures in having to complete the work of the primary roofing contractor.
- In the end, the primary roofing contractor has either disappeared for good or filed for bankruptcy protection as a result of his/her actions.
- Most disturbing, the worker who got hurt or died has no re-course for himself or his survivors.
- Even more disturbing, the tax payers of the county hospital end up footing the medical bill as a result of the injury or death.
- But, that sure was a good price on bid day!
Today, there is nothing within any current Texas Law to prevent Primary (1st Tier) roofing contractors from operating as what can be determined to be “Broker Contractors”. Furthermore, it takes a complaint by a competitor of the Broker Contractor to initiate any investigative action against the Broker Contractor. Most legitimate primary roofing contractors do not want to partake in “whistle blowing” activity because if they were found to be initiating such complaints, they themselves could be black-listed by the General Contractors and Construction Managers who need the ability to get that “super Low Price” on bid day.
The only possible way for anything to change in the Public Construction Market is to eliminate the broker contractor as a 1st Tier Primary Contractor and to eliminate the 2nd tier labor only contractor from doing business in the public market. The State of Texas needs to develop an aggressive plan of action with regard to worker misclassification in residential and commercial construction, payroll fraud, workers compensation fraud etc. etc. Much like Florida has done with regard to workers compensation fraud. The work done in 2013 regarding a $200 fine is a step in the right direction, but it is not anywhere close to being a deterrent as it requires the legitimate contractors to file complaints to make something happen.
For those of us who do operate correctly, we pay a much higher premium for our ethics due to the fact that there is so much fraud in the construction industry in the State of Texas. How many schools are built by un-authorized to work individuals who are being paid production rates versus wage rates?? The only reason that Independent Labor only contractors even exist today in Texas is a result of failed immigration reform. The workers who work with these labor only contractors cannot go to work for real companies because of their legal status. The issue is much bigger than just employee misclassification or workers compensation insurance, it is a moral, ethical and employer responsibility issue. That being said, it is also a Buyer issue in that those controlling the purse strings have to make a commitment to ensuring that their construction spending is being spent on companies who support employee driven workmanship, support employee benefits and support the investment that some companies make in their own operations.
How do we allow for almost every new home constructed in Texas to be done in a manner where the un-licensed trade contractors all operate as independent contractors and not one penny is spent on payroll taxes to the State of Texas?? Do some research, go into a new construction housing area and spend a little time with boots on the ground. Look for roofers, framers, concrete finishers, masonry workers, flooring workers, painting workers etc. Gather them up and ask them how they are getting paid?? Do they work by the hour or by the piece?? Ask them if they are here legally or illegally?? (Be careful as this line of questioning may be considered discriminatory under Federal Law). Ask them where they go if they get hurt on the job?? Ask them who pays for their medical bills if they get hurt on the job?? You will find that the answers are consistent within the message portrayed in this document. As law makers, I ask that you “Take the blinders off”, put away the “campaign contributions” from BIG OWNERS who will do anything to secure profits at the expense of those actually doing the work!!!!!!! In the summer of 2013, groups representing home builders clearly stated that any action to require home builders to use trade contractors who operated with employees versus piece work labor only independent contractors would have a devastating impact on their business model. So that’s it in a nutshell!!!!
Why does Texas have an Education problem?? Why does every major city have a road problem?? Why do we have high federal tax rates?? Why, Why, Why when it comes to State and Federal Issues ----------- because the laws allow the fraud to exist with very little consequence for those who are willing to sprint to a profit, here today and gone tomorrow business plans versus treating legitimate business ownership and responsible management as the State mandated way to be in business.
The Construction Citizen group of employers and industry professionals as well as the Construction Career Collaborative from a construction owner point of view is a step in the right direction for leveling the playing field. It is time for legislators to help us make construction a sought after trade by our young people and provide responsible business owners and employees a path to sustainability that is supported by comprehensive and effective law making.
From a worker’s compensation insurance perspective, the trade contractors who truly operate with employees (like the members of Construction Citizen) are fighting an uphill battle in being able to compete with the fraud. Companies who operate with employees take great RISK when it comes to employee health and safety. We invest in these employees from recruiting, to training & retention and when accidents occur, we take responsibility. In the end, we get penalized in our Experience Modifier Rating (EMR) as a result of our reported losses. The worker’s compensation insurance industry needs to change how it rates companies who truly operate with employees. There needs to be a “favorable multiplier” placed on EMR’s of legitimate, employee driven trade contractor entities. On the other side, there needs to be a “not so favorable multiplier” placed on the EMR’s of Broker Contractors, those who operate without a single employee when it comes to “who” is doing the work for the Broker Contractor. As it is today, the Broker Contractor with a worker compensation policy on 5 office staff employees has no losses and a great EMR. Unfortunately, the buyer does not know that the contractor has NO employees when it comes who will be doing the work on the commercial project (new or reroof) and/or the residential house (new or reroof).
In conclusion, I have been in business for myself the last 10 years. Since 2012, our company has been an E-Verify participating company. Unfortunately and as a result of our own convictions, we are losing work every day where the buyers could care less about “who” is doing the work or if they are in compliance by having legitimate workers compensation insurance. It is way too easy for roofing contractors and other non-licensed trade contractors to be in business in Texas. It is difficult to be in business with strong convictions.
This conviction is being tested even as we speak as legitimate employee driven companies try to overcome further Federal legislation with regard to increased regulatory requirements (healthcare, OSHA fall protection, OSHA DOT requirements, OSHA Hazard Communication regulations etc. etc.) Many legitimate contractors are surely asking themselves one simple question. If State lawmaking does not support legitimate business operations within the construction industry, then what is the point of continuing to operate legitimately?? Why not just join the establishment, sprint to profits and get the heck out of the industry sooner rather than fighting for convictions and principles that are not the majority within the construction industry in Texas. Texas is a great place, but we need to make it better when it comes to the Construction Industry, employee misclassification fraud and worker’s compensation fraud not to mention tax fraud.
I know that you are committed to finding a comprehensive solution to these problems. Contractors like myself understand how difficult the challenges are but that should not keep your committee from doing what is right.
Michael E. Beeter
BRI Roofing & Sheet Metal, LLC
dba BRI Commercial Roofing