Panel examines payroll fraud

(March 13, 2013) Payroll fraud dramatically reduces the income of millions of US workers, Kim Bobo of Interfaith Workers Justice said today at a Washington DC meeting on the issue.

A major concern is that workers are arbitrarily classified as independent contractors, thus relieving their employers of the need to pay social security taxes, time and a half for overtime, unemployment insurance, and workers compensation as would be the case if the workers were hired directly by the employer. This reduces employer’s costs, at the cost of depriving workers of unemployment compensation if they are laid off, workers compensation if they are injured on the job and social security retirement benefits This represents approximately a 30 percent cost deduction for employers that falsely categorize employees as independent contractors and an equivalent income loss to employees.

Many millions of employees are wrongly classified as independent contractors when, under the law, they actually should be classified as working for firms. A major reason why they are able to do so noted by Bobo and other panelists, who included Sarah Leberstein of the National Employment Law Project, Matthew Capece of the United Brotherhood of Carpenters and Heather Rowe of the Commonwealth of Massachusetts, is lack of enforcement of the relevand laws.

Bobo pointed out that the US Department of Labor has only 1000 enforcement staff to supervise labor law compliance for 163 million US workers. Rowe spoke of Massaachusetts efforts to increase labor law compliance. Income in the form of newly paid taxes has increased substantially, due to new efforts such as increased cooperation between state agencies and also local government agencies in Massachusetts, leading for example to a construction firms request for building permits being rejected because it is behind in making unemployment compensation payments. Nonetheless much remains to be done in Massachusetts to address the problem, Rowe indicated.

Payroll fraud in the construction industry is widespread according to Capece. He gave an example of a Florida construction firm, E-South Construction that claimed 4 employees with a yearly payroll of $43,200 when purchasing workers compensation insurance. But 450 certificates of insurance were issued and $11 million was paid to “independent contractor” workers.

Using an independent contractor system where there is a chain of contractors before getting to the actual workers also helps to shield large firms from legal liablitiy for such things as construction accidents, by making their legal responsiblities more difficult to establish. Also, if an individual labor subcontrator is convicted of some fraud with respect to his workers, the labor subcontractor can be replaced by another, keeping the overall system intact, to the benfit of the larger corporation. Capece pointed out that Pulte Homes does not employ any construction workers directly, in spite of being one of the largest homebuilding firms in the country.

By violating the law, corrupt construction firms are able to underbid and steal business from honest firms and their employees. Law abiding firms recognize this and have been supporters of recent legislation in various states to increase compliance with employment laws, as well as stepped up enforcement efforts.

Leberstein gave an overview of enforcement activity in the payroll fraud area, including new legislation. For example, in 2010 a New York state task force discovered 18,500 instances of employee misclassification, discovered over $314 million in unreported wages, assessed over $10.5 million in unemployment taxes and over $800,000 in worker compensation fines and penalties.