With each passing day, state and federal governments are getting more serious about rooting out and eliminating worker misclassification, sometimes known as payroll fraud. But much more must be done to end what has been called a "cancer...eating at the heart of our industry."
Regular readers of Construction Citizen know that worker misclassification happens when a company pretends its employees are “independent subcontractors” with the intent of skirting payroll taxes and benefits like workers’ compensation insurance and – because of their reduced labor costs – are able to submit lower bids for projects, undercutting ethical contractors.
In Professional Roofing Magazine earlier this year, attorney William E. Burnett gave contractors an in-depth look at the problem from all angles.
Burnett clearly laid out the problem and the consequences. He also cited recent studies showing how it intensified:
One of the most comprehensive studies regarding the underground construction economy describes the construction industry in California. The study, conducted in 2014 by the Economic Roundtable, concluded 143,900 jobs (one out of every six jobs) in California's $152 billion construction industry were part of the underground construction economy in 2011. Of these, 104,100 jobs were unreported by employers, and more than 39,000 employees were misclassified as independent contractors.
According to the study, in 2011, underground construction activity in California deprived the federal government of $301 million in tax revenues. California also lost $473 million in tax revenue, which included $63 million in uncollected unemployment insurance, $146 million in state disability taxes and missing workers' compensation contributions of $264 million. The California report also found specialty trades, such as drywall contractors, have the highest rates of underground activity, with more than 25 percent of all workers employed in the underground economy in 2012.
Studies conducted by other states describe similar situations. The Texas Workforce Commission estimates roughly 35,000 workers in Texas were misclassified between 2010 and 2012. Of those, about 4,300 workers were a part of the underground construction industry. According to a report by Texas' Legislative Budget Board, misclassified workers deprived the state of $2.4 million in contributions to the state's unemployment insurance fund.
Burnett also highlights the actions that can be taken right now by contractors who want to do the right thing and abide by the law:
As a reputable contractor, you have several options to combat underground construction activity and worker misclassification. First, reach out to your state workforce agencies; many of them have divisions that investigate and monitor underground activity. These agencies often set up ways to anonymously report any suspected fraudulent activity. Also, work to educate project owners and general contractors about the risks of doing business with unscrupulous contractors. General contractors, in particular, should be made aware of the requirements of the Fair Pay and Safe Workplaces Executive Order and will face the risk of debarment from federal projects if their subcontractors fail to comply with the law.
Also make efforts to support and pass legislation in your state and municipality that impose stiff penalties on contractors who do not follow the law. On a federal level, push for Congress to reintroduce legislation such as the PFPA, which could encourage states to use the PFPA as a model to enact similar legislation.
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