Blockbuster Report on Construction Industry Tax and Wage Cheating
For 12 months, McClatchy reporters have been carefully digging into a pit of corruption, gathering payroll records in 28 states and interviewing hundreds of workers and business owners about an epidemic of tax cheating, wage theft, and exploitation in the construction industry. The extraordinary report of their investigation was published Thursday, and it’s hair-raising. More than one-third of the employees working on federally-funded projects in Texas and Florida, overseen by public housing authorities and monitored by the U.S. Department of Labor, were improperly classified as independent contractors. The contractors misclassified them in order to escape paying worker’s compensation premiums, unemployment insurance taxes, and FICA taxes, to avoid complying with immigration document requirements, and to avoid liability for labor law violations. In just Florida, Texas, and North Carolina, McClatchy estimates that half a million workers were misclassified, and that the state and federal governments were cheated out of approximately $2 billion in taxes as result.
The stories make the damage this does to the labor market utterly clear. Construction wages were lower in 2012 than they were in 1980, despite rising productivity and huge profits in the industry. Even skilled tradesmen like plumbers and electricians earned 12 to 14 percent less than thirty years ago. Labor law offers no protection to independent contractors, who are not entitled to the minimum wage, overtime pay, or the right to join a union and bargain collectively. Exploited workers—many of them undocumented immigrants who live in fear of deportation—work without adequate safety protections, sometimes receive far less than the pay they were promised, and are deprived of the safety net’s protections if they lose their jobs, are injured or disabled, or reach retirement age. They often live in slum conditions, even while working on luxurious and glitzy new housing.
The understaffed Labor Department Wage and Hour Division has been able to do little to combat this epidemic, yet its spokesman downplayed the disaster, even going so far as to exaggerate the agency’s enforcement efforts. According to McClatchy, the spokesman claimed “the agency has hired an additional 1,309 investigators and conducted thousands more annual investigations since 2008.” Sadly, the fact is that DOL’s Wage and Hour Division doesn’t even have 1,309 investigators, and certainly hasn’t hired 1,309 additional investigators. And while it might do more investigations today than ten years ago under George W. Bush, it does fewer investigations now than it did under Jimmy Carter 35 years ago—in a nation that has grown 60 percent larger.
McClatchy’s report slams the federal government for its failure to tackle a problem that might easily be costing it $8.5 billion a year in uncollected taxes. Federal housing officials don’t enforce tax law, and Labor Department officials barely mentioned misclassification when they provided training to local officials. According to McClatchy, “at a daylong training seminar streamed over the Internet to more than 5,000 community officials monitoring payroll records in 2011, a labor official spent less than 15 seconds describing the practice and offered no instructions on how to stop it.” When McClatchy asked Brian Gage, a senior policy advisor to the Houston Housing Authority, what his staff was doing to root out the tax cheats, he said his staff didn’t pay attention to tax withholding. “I’m not sure we want to get into any IRS business,” Gage said.
Much of the misclassification and tax cheating McClatchy describes is criminal, done knowingly to avoid tax obligations and gain an unfair competitive advantage. The news organization and its dedicated reporters have done a public service by taking on the kind of investigation Congress ought to have done. But only Congress can provide sufficient resources to the IRS and the Labor Department to clean up an industry that has grown used to getting away with financial murder.
The states that have taken misclassification seriously have made headway against it. Illinois, California, and New York formed interagency task forces and dedicated staff to cracking down on misclassification. In a single year, California conducted 862 audits and reclassified more than 11,000 workers who were not reported as employees or were misclassified as independent contractors. The New York task force found more than $333 million in unreported wages last year alone.
Misclassification is a problem with a solution. But it takes a government that cares enough to protect honest businessmen, deserving workers, and the taxpaying public—a government willing to devote sufficient resources and attention to enforce the law.