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AG Racine Releases Report on Payroll Fraud in District Construction Industry (DC)

Posted by National Alliance for Fair Contracting on

Report Details How Companies Evade Taxes and Reduce Workers’ Take-Home Pay by Illegally Misclassifying Workers as Independent Contractors

by Construction Citizen | September 20, 2019

Attorney General Karl A. Racine released a report last week demonstrating how District of Columbia construction companies hurt workers, cheat taxpayers, and undercut law-abiding competitors when they illegally misclassify workers as independent contractors. Worker misclassification is a form of payroll fraud where employers categorize workers who should be considered direct employees as independent contractors. This practice is used by unscrupulous employers to get around labor laws and reduce costs, and it is especially common in the construction industry. The Office of the Attorney General (OAG) commissioned this report as part of a broader effort to crack down on wage theft in the District.

“Companies that illegally misclassify employees as independent contractors are stealing from workers, evading taxes, and gaining an unlawful edge over competitors,” said AG Racine. “The Office of the Attorney General commissioned this study to better understand the dynamics of worker misclassification and how we can fight it – and the economic analysis shows just how much this illegal practice costs workers and the community. Indeed, my office has already taken several companies to court to stop this kind of payroll fraud, and we will continue to act to protect workers when businesses violate the District’s labor laws.”

In the District, businesses are legally required to pay employees a minimum wage, contribute toward their state and federal taxes, and provide overtime pay and other benefits. Businesses do not have the same responsibilities to independent contractors, who must pay all their own taxes, are not protected by most labor laws, and do not have access to workers’ compensation or unemployment insurance. Numerous studies have documented that employee misclassification schemes are pervasive in the construction industry.

The District’s Workplace Fraud Act, which applies to the construction industry, requires companies to classify workers as employees in most circumstances. To classify a worker as an independent contractor, construction companies must prove that an individual is free from the employer’s direction and control, is economically independent, and that their work falls outside of the core business of that company.

OAG’s new report, which includes analysis by labor economists Dr. Dale Belman and Dr. Aaron Sojourner, reveals that District construction companies that misclassify workers unlawfully avoid at least 16.7 percent in labor costs compared to companies that operate legally. They do this by failing to pay overtime, shifting tax burdens to workers, and evading other taxes and required payments entirely. When employers who misclassify workers evade taxes, the District loses out on funding for critical social safety net programs. If these companies are engaged in other forms of wage theft, their savings at the expense of workers can exceed 40 percent.

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OAG’s Increased Efforts to Protect Workers

OAG’s efforts to fight worker misclassification are just one part of a broader push to protect District workers. Last year, OAG stepped up wage theft enforcement after working with the D.C. Council on legislation granting the agency independent authority to investigate and bring these cases and increased penalties on employers who violate the District’s wage and hour laws. Wage theft is the illegal practice of denying workers’ wages or benefits they have earned. This happens when employers withhold pay, pay less than the required minimum wage, force workers to work extra hours without pay, refuse to pay overtime, or misclassify employees as contractors. Wage theft affects millions of workers nationally and happens across job types and income levels. Workers in low-wage jobs and immigrants are especially vulnerable to this type of exploitation.

Since it gained new enforcement authority, OAG can now seek to recover stolen wages, restitution of up to three times the amount of unpaid wages, and penalties from employers, and can also bring criminal charges. So far, OAG has launched more than 30 investigations into wage theft and payroll fraud, and has taken action against a home health care service provider, a national electrical contracting firm, KFC franchises, a cell phone store, a cafe chain, and other businesses that harmed District workers. To date, OAG has obtained over $400,000.00 in judgments and settlements against businesses that have stolen wages from District workers.

How to Report Wage Theft Violations

Workers who believe that they have experienced wage theft or other wage and hour violations can submit a complaint to OAG by phone at (202) 442-9854. Workers can learn about their rights under District law and how they can get help if their rights are being violated on the OAG website.

(Read More)

“Unfair competition for law-abiding companies: The increase in the proportion of construction workers who are misclassified as independent contractors impacts how business is done in the construction industry. Companies that fraudulently misclassify gain the advantage of reduced labor costs. They are in a position to submit lower bids than competitors who follow the law. As the number of companies that misclassify increases, law-abiding companies win fewer bids, and have less work. Over time, misclassification progresses from a method used by unscrupulous companies to earn additional profits to the price of survival in the industry. Reducing the use of misclassified workers provides a level playing field for law-abiding companies.” – According to Dr. Dale Belman and Dr. Aaron Sojourner whose economic analysis is cited in the report.

(PDF Copy of OAG Report on – Illegal Worker Misclassification: Payroll Fraud in the District’s Construction Industry)

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Racine slated to testify in Congress in wake of AG’s report on illegal worker misclassification in DC’s construction industry (DC)

Posted by National Alliance for Fair Contracting on

By Kevin Fasic and Anthony N. Delcollo
August 15, 2019 at 11:10 AM

DC Attorney General Karl Racine is set to testify Thursday at a U.S. House hearing on misclassification of employees as a form of payroll fraud, the subject of a report released earlier this month by Racine’s office on how the practice affects the District’s construction industry.

Racine is one of six witnesses called by the Education & Labor Committee’s Workforce Protections Subcommittee for a 10:15 a.m. hearing on “Misclassification of Employees: Examining the Costs to Workers, Businesses, and the Economy.”

The report commissioned by Racine’s office – “Illegal Worker Misclassification: Payroll Fraud in the District’s Construction Industry” – found that by illegally misclassifying employees as independent contractors, construction companies in the District can evade at least 16.7% of the cost of doing business. The report is the latest step in the attorney general’s broad effort in recent years to curb wage theft in DC.

“Here in the District we believe it is incredibly important to protect workers’ rights, including workers’ rights to fair wages, overtime pay, sick and safe leave, and to help create economic opportunity for all of our residents,” Racine said at a Sept. 10 panel event at Georgetown University. Safe leave enables workers to take job-protected time off to cover their needs if they or an immediate family member are the victim of domestic violence, stalking or human trafficking.

Racine delivered the report’s findings at a forum hosted by the Kalmanovitz Initiative for Labor and the Working Poor, within Georgetown’s School of Continuing Studies. The initiative works to develop innovative strategies and public policies to improve workers’ lives in a changing economy, according to its website.

“Our local economy clearly is growing in DC,” Racine said. “But what we don’t see often enough is the very fact that workers, oftentimes immigrant workers, are being treated poorly and are having their wages taken from them.”

By treating employees as contractors, companies are able to skirt paying payroll taxes and Social Security, overtime, sick leave and other benefits that would otherwise be due. About two-thirds of the savings from misclassification is taken from workers and the remaining third from society at large in the form of unpaid taxes, according to the report. The authors of the study are Dale Belman, a professor at Michigan State University’s School of Human Resources and Labor Relations, and Aaron Sojourner, an associate professor at the University of Minnesota’s Carlson School of Management.

Within DC’s construction industry, “we have things such as a lot of undocumented workers,” Sojourner said at the Georgetown event. “They are not in a good position to go to their boss and go, ‘You know, you owe me an extra $4 an hour. I’ve done the calculations – if you classified me properly, this is what I should be getting.'”

(Read More)

Evers announces members of worker misclassification task force (MN)

Posted by National Alliance for Fair Contracting on

By: Nate Beck
Jul 26, 2019

Gov. Tony Evers on Friday announced appointments to a task force that will examine worker misclassification and payroll fraud in Wisconsin.

The appointments come after Evers in April signed an executive order forming the group to re-examine how the state enforces misclassification – a practice believed to be rampant in the construction industry. The task force is charged with developing recommendations on the topic and reporting its activities and findings to the governor on or before March of each year.

“Individual agencies do a great job at combating this serious issue that adversely affects some of our most vulnerable workers, but through this task force, agency efforts will be better coordinated,” Evers said in a statement. “By evaluating each agency’s approach and investigation methods and sharing best practices, our efforts to support Wisconsin workers who are left without important safeguards like unemployment insurance and labor protections will be more strategic and coordinated.”

The task force will be staffed by the Department of Workforce Development and DWD Secretary-designee Caleb Frostman will serve as chair.

DWD’s Unemployment Insurance Division enforces worker misclassification and in 2018 conducted 2,459 audits of companies, identifying 8,877 misclassified workers. The agency last year collected more than $1.5 million in unemployment insurance taxes, interest and penalties.

“I am excited to chair this important task force and proud of the work that investigators have done and will continue to do to help eradicate worker misclassification,” said DWD Secretary-designee Frostman. “The goal of the task force is to give our front-line staff even more tools and strategies that they can employ as they continue their work to support the Wisconsin worker.”

(See Article)

Sweeney Urges Follow Through on Effort to Prevent Misclassification of Workers (NJ)

Posted by National Alliance for Fair Contracting on

June 11, 2019, 10:40 am
Insider NJ

Trenton – The year-long wait for action by the task force established by the governor to stop the misclassification of workers has allowed unscrupulous developers and contractors to continue to ignore the labor laws intended to protect workers’ rights.

In May of 2018, Governor Murphy signed an executive order establishing the Task Force on Employee Misclassification to investigate employee misclassification and develop recommendations to enforce compliance with the laws “ensuring adequate workplace protections and providing employment-related benefits like unemployment insurance and workers’ compensation.”

To date, the task force has failed to produce any public results.

“The construction industry has been plagued by the dishonest and illegal actions of unscrupulous developers and contractors and we are all paying the price,” said Senator Sweeney (D-Gloucester/Salem/Cumberland). “The misclassification of workers has resulted in wage theft, off-the-books payments, underfunding workers’ compensation and avoiding taxes. They are exploiting workers for their own gain.”

Employers often misclassify their employees intentionally in order to reduce labor costs, avoid paying state and federal taxes, and boost their own profits.

“Protecting workers’ rights is an important function of government and there should be follow through on the intended work of the task force,” said Senator Sweeney. “During this delay, workers are losing benefits, wages and other compensation. It should be brought to an end.”

(See Article)

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Springfield can be the first to end construction tax fraud [Guest viewpoint] (MA)

Posted by National Alliance for Fair Contracting on

Posted May 6, 12:46 PM
By Tim Craw

I’m proud to work in Springfield. The people here are tough, hardworking, and innovative. It’s no surprise that the city is known as ‘The City of Firsts.’

Now, Springfield has the chance to be the first city to stop the epidemic tax fraud taking place in the construction industry. Criminal contractors are cheating the public, honest businesses, and local workers by neglecting to pay their fair share of employment and payroll taxes. It costs the American people $80 every second, and up to $2.6 billion a year in lost federal and state income.

Tax fraud is often committed through underhanded bookkeeping and worker exploitation. Frequently, developers and contractors will use labor brokers to do the dirty work of hiring employees off the record. Approximately 1.2 million workers are paid ‘off the books’ each year in the U.S., allowing contractors to avoid rules around safe jobs sites, deny benefits and workers compensation, skip out on payroll taxes, and even withhold or minimize workers’ payments. Other times a contractor might use ‘on the books’ methods, but cheat by requiring the worker to carry tax and other employment obligations. Nearly 300,000 construction workers are misclassified as ‘independent contractors,’ even though they work a full-time employee’s job.

In Massachusetts, illegal practices like these, particularly wage theft, denied overtime, and minimum wage violations, result in $700 million in losses to employees annually. The Massachusetts Attorney General reported in a 2018 fair labor report that wage theft, worker misclassification, and exploitation of young workers resulted in restitution and penalties of $9.6 million.

The contractors who skip taxes and shortchange workers can gain up to a 30% savings on labor costs, putting honest employers at a disadvantage. They do business the right way but aren’t able to issue as competitive bids, and are cheated of potential work.

The public is also affected by this problem, because when taxes go unpaid, tax pools receive less funding. Public services such as schools, roads, bridges, first responders, and Medicaid and Social Security suffer. The Massachusetts Joint Enforcement Task Force on the Underground Economy and Employee Misclassification reported that in 2014 alone, $16.5 million was recovered in lost payroll taxes and unemployment insurance. The money being pocketed through tax fraud schemes should be helping keep our state safe or close the gap in funding for our schools. These improvements could all be made without creating more debt.

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Tim Craw is a Council Representative with the New England Council of Carpenters and a member of Local 336.

(Read More)

Northam signs executive order establishing task force on worker misclassification, payroll fraud (VA)

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AUTHOR – Augusta Free Press
PUBLISHED – Aug 11, 2018

Governor Ralph Northam signed an Executive Order establishing an interagency task force on worker misclassification and payroll fraud. The misclassification of employees as “independent contractors” undermines businesses that follow the law, deprives the Commonwealth of millions of dollars in tax revenues, and prevents workers from receiving legal protections and benefits.

“Treating Virginia workers fairly is central to building an economy that works for everyone, no matter who you are or where you live,” said Governor Northam. “Every employer in the Commonwealth should be playing by the same rules and this task force will come up with a comprehensive plan to make sure workers aren’t missing out on the protections and benefits they would receive if properly classified.”

A 2012 report of the Joint Legislative Audit and Review Commission (JLARC) found that one-third of audited employers in certain industries misclassify their employees. By failing to purchase workers’ compensation insurance, pay unemployment insurance and payroll taxes, or comply with minimum wage and overtime laws, employers lower their costs as much as 40%, placing other employers at a competitive disadvantage.

The task force will develop and implement a comprehensive plan with measurable goals, including identifying ways to hold companies working on state contracts who commit payroll fraud through misclassification of workers accountable, and identifying ways to deter future inappropriate conduct by recommending enforcement mechanisms.

Secretary of Commerce and Trade Brian Ball will chair the task force. It will include representatives from the Virginia Employment Commission, the Department of General Services, the Department of Labor and Industry, the Department of Professional and Occupational Regulation, the State Corporation Commission’s Bureau of Insurance, the Department of Taxation, the Workers’ Compensation Commission, and the Office of the Attorney General.

The group will develop a work plan by November 1, 2018 and report to the Governor on its progress by August 1, 2019.

The full text of Executive Order Sixteen can be found here.

(See Article)

New Jersey Passes Laws on Sick Leave and Pay Equity; Will Tackle Worker Misclassification (NJ)

Posted by National Alliance for Fair Contracting on

The National Law Review
Wednesday, May 9, 2018

A little more than 100 days into his tenure, New Jersey Governor Phil Murphy has made it clear that employment is one of his top priorities. In the past two weeks, Gov. Murphy has signed a Paid Sick Leave and an Equal Pay bill into law and established a Task Force on Employee Misclassification.

Paid Sick Leave

The New Jersey Paid Sick Leave Act was signed into law on May 2, 2018, and takes effect on October 29, 2018. It will require New Jersey employers of all sizes to offer their employees one hour of sick leave for every 30 hours worked.

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Task Force on Employee Misclassification

On May 3, 2018, Gov. Murphy signed an executive order establishing a Task Force on Employee Misclassification. Misclassification is when workers are incorrectly labeled as independent contractors rather than employees. Workers who are incorrectly classified frequently are not provided benefits and other protections available to employees, such as minimum wage, overtime compensation, family and medical leave, unemployment insurance, and workers’ compensation.

The New Jersey Task Force will be charged with a number of responsibilities to combat employee misclassification, including:

  • Examining and evaluating existing misclassification enforcement by executive departments and agencies
  • Developing best practices by departments and agencies to increase coordination of information and efficient enforcement
  • Developing recommendations to foster compliance with the law, including by educating employers, workers, and the public about misclassification
  • Conducting a review of existing law and applicable procedures related to misclassification

(Read More)

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Seventh Circuit Revisits Contractor Misclassification

Posted by National Alliance for Fair Contracting on

Thursday, June 28, 2018
Hannesson Murphy

Courts in the U.S. have been grappling with the misclassification of independent contractors for more than 20 years. As our readers well know, there is no standardized test to determine whether a worker is a contractor. Various courts and government agencies all have adopted their own criteria. Fortunately, most of them overlap, but there can be critical differences in the factors and how they are applied.

In 2015, the Wage and Hour Division of the U.S. Department of Labor (DOL) firmly supported the “economic realities” test as part of a government sponsored misclassification initiative. While not breaking new ground by adopting the test, the DOL’s pronouncement did create somewhat of a splash at the time because it deliberately downplayed the relative importance of control over a worker – which previously had been viewed as the most important aspect of the contracting relationship. See Administrator’s Interpretation No. 2015-1 (July 15, 2015). In the years since its issuance, the DOL’s advisory opinion largely has been sidestepped by several tribunals charged with examining the issue in favor of their own well-worn standards.

A decision by the Seventh Circuit last week, Simpkins v. DuPage Housing Authority, appears to be the latest in that trend. In the case, Anthony Simpkins dutifully signed “independent contractor agreements” with the DuPage Housing Authority, in 2009 and again in 2012, to perform general labor, such as carpentry, maintenance, demolition and remodeling, on some vacant properties to get them ready for new occupants. This was a full time job, but provided no benefits and Simpkins was responsible for his own taxes. While the housing authority claimed he had the discretion on how to perform the job as he saw fit, the housing authority directed him on which jobs to perform and prioritized the order in which he would need to complete them. Simpkins objected to his status and repeatedly asked to be reclassified as an employee so he could get benefits, but his efforts were rebuffed.

After Simpkins was injured in a car accident, he filed suit to recover unpaid overtime and disability benefits under the FLSA, as well as under Illinois state law. The district court agreed with the housing authority that Simpkins was a contractor and granted summary judgment. On appeal, however, the Seventh Circuit reversed.

(Read More)

Simpkins v. DuPage Housing Authority, No. 17-2685 (7th Cir. 2018)

Cooper signs worker misclassification, tax bills into law (NC)

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By Associated Press |
Posted: Fri 9:34 PM, Aug 11, 2017

RALEIGH, N.C. (AP) – Gov. Roy Cooper says legislation he signed will help North Carolina workers when employers intentionally misclassify them as independent contractors to avoid paying taxes and other benefits.

Cooper signed two bills Friday the General Assembly approved last week.

One addresses employee “misclassification” by confirming the creation of an office within the North Carolina Industrial Commission to investigate companies and discourage the practice. Former Gov. Pat McCrory signed an executive order directing the commission’s new work, but the law makes the effort permanent.

The other signed bill makes various tax law changes, including the creation of an income tax refund “checkoff” for breast and cervical cancer detection.

Two other bills remain on Cooper’s desk. He has until late Monday to sign or veto them. Otherwise, they become law.

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NLRB Memo Lays Out Misclassification Theory

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August 30, 2016
By Lawrence E. Dubé

Aug. 29 – The National Labor Relations Board’s general counsel released a legal memorandum explaining his theory that an employer committed an unfair labor practice by misclassifying employee drivers as independent contractors (Pac. 9 Transp., Inc. , NLRB Div. of Advice, No. 21-CA-150875, 12/18/15 [released 8/26/16]).

The unfair labor practice theory involving worker misclassification hasn’t previously been tested before the NLRB or the courts, but the memorandum shows that’s the approach the general counsel will likely follow in other independent contractor disputes.

In the memorandum released Aug. 26, the NLRB’s Division of Advice wrote that by misinforming drivers they were independent contractors, Pacific 9 Transportation Inc. interfered with the drivers’ rights under the National Labor Relations Act to organize or engage in concerted activity for their mutual aid or protection.

(Read More)