Key lawmakers in Washington have pledged to look further into a McClatchy report on companies with federal contracts that defied labor laws in order to avoid their tax obligations.
Democrats and Republicans expressed outrage about the investigative findings, including that as much as billions in taxpayer dollars were being squandered by companies on stimulus projects and other federal contracts by wrongly identifying their workers as independent contractors instead of as employees in order to undercut competitors and lower costs.
Congressional aides expect McClatchy’s multi-part series, called “Contract to Cheat,” to be the focus of hearings on Capitol Hill after the midterm elections. State leaders have vowed to investigate legislative and regulatory options to combat the practice on government contracts. And business and labor groups say they’ll use the findings to call on their state and federal leaders to help root out bad actors who cheat honest employers out of jobs.
“This series should be a wakeup call for Washington,” said Sen. Sherrod Brown, D-Ohio, who has introduced legislation on misclassification that has been stuck in the Senate.
In the five-part series, McClatchy reported that the federal government looked the other way in the midst of rife cheating on federal contracts following the 2009 stimulus in the rush to resuscitate a economy on the brink of collapse.
Scofflaws across the country, from North Carolina to California, were able to save 20 percent or more by not paying state and federal taxes. They cheated out competitors and exploited desperate workers, denying them unemployment benefits and often overtime and workers compensation.
“Misclassification of workers has plagued the building trades for years,” said Brown, who plans to reintroduce his legislation later this year. “The practice harms workers, puts legitimate businesses on an unequal playing field, and robs city, state and federal governments.”
Reporters from eight McClatchy newspapers and its Washington bureau, along with ProPublica, a nonprofit investigative news organization in New York, spent a year visiting federal construction sites, talking to hundreds of workers and company bosses.
The practice was so pervasive on federal contracts that billions in potential tax revenues were kept by construction firms and their workers. In Florida alone, the McClatchy analysis showed that nearly $400 million in tax revenue was lost. In North Carolina, nearly $500 million. And in Texas, roughly $1.2 billion.
“Clearly, there has been inadequate oversight of President (Barack) Obama’s stimulus funding, with lucrative contracts given to tax cheats and the politically favored,” said Rep. Robert Pittenger, R-N.C., who sits on the House Financial Services Committee.
Sen. Bob Casey, D-Pa., who leads Senate subcommittees on employment and workplace safety as well as taxation and Internal Revenue Service oversight, said he hopes the McClatchy series will help bring more attention of the problem to the public and to Washington.
“More tools are needed to round up the bad actors who are gouging workers and taxpayers,” said Casey. He has introduced legislation that increases penalties against those who misclassify their workers.
McClatchy found that regulators at the top levels of the administration, including the Department of Labor and Department of Housing and Urban Development, failed to alert one another of red flags or to share key information that could stop the tax cheating.
In North Carolina, after reporters began inquiring about misclassification on stimulus-funded projects overseen by the North Carolina Housing Finance Agency, officials urged federal officials to give them guidance. At a HUD training session in July, a finance agency official asked HUD regulators how to handle payroll reports showing companies likely misclassified their workers.
HUD would not discuss it, finance agency officials said. Bob Kucab, executive director of the North Carolina Housing Finance Agency, said his agency will not wait for HUD’s instructions but instead will come up with guidelines and requirements for the developers they engage for tax credit-funded affordable housing projects.
Rep. George Holding, R-N.C., contacted HUD this week seeking more information about misclassification of employees.
“The alleged misclassification of employees on taxpayer-funded projects is unfair, dishonest and has no place in North Carolina,” Holding said. “If true, this would be just another example of government bureaucracy run amok.”
HUD couldn’t immediately address the North Carolina training but confirmed that it had been contacted by the congressman.
Several lawmakers called for better coordination among state and federal agencies.
“We have to do a better job of ensuring that workers and business owners in North Carolina and around the country are getting a fair shake, especially for taxpayer-funded projects,” said Rep. David Price, D-N.C.. “Employers will only stop cheating the system if state and federal regulators get serious about policing contracts and reining in bad actors.”
Misclassification could become a factor in one of the most closely watched Senate races that could determine which party controls the higher chamber. Sen. Kay Hagan, D-N.C., is looking to fend off a challenge by a former colleague in the state legislature, North Carolina House Speaker Thom Tillis.
Hagan said misclassification hurts workers and other businesses that play by the rules.
“All levels of government should work together to ensure that employees are properly classified so that their rights are protected and honest businesses can compete on a level playing field,” Hagan said in a statement.
Tillis blamed the problem on the Obama administration for failing to crack down on the problem when it could. Tillis wasn’t available for an interview, but his spokesman, Daniel Keylin, said the federal government needs to enforce existing laws and collect owed taxes.
Politicians on either side of the political aisle remain far apart on how to fix the problem.
Pittenger blamed Senate Democrats for failing to take up legislation the House of Represenatatives passed last year that would prevent government contracts of $150,000 or more from going to tax-delinquent companies.
“Incredibly, the IRS has time to target organizations . . . due to their political views,” he said, “but doesn’t have time to adequately enforce existing laws regarding employee classification and payroll taxes. The primary problem is a lack of accountability in Washington.”
Legislation introduced by Casey and Brown has yet to gain the needed bipartisan support. Casey also blamed Republican senators for blocking the appointment of a new wage and hour administrator at the Department of Labor for six years, which he said made addressing the problem of worker misclassification and payroll fraud even more difficult.
Economist David Weil, who has written extensively on misclassification, was confirmed earlier this year.
Weil said in a statement this week that the Labor Department appreciated the attention the McClatchy investigation brought to misclassification, “which is a serious problem for workers, employers and the economy.” Weil said the agency is using every enforcement tool at its disposal. Still, he said, officials are looking for new ways to combat the problem, including stronger enforcement mechanisms. He said the agency also is increasing educational opportunities for employers to help them understand and comply with the rules.
“At the end of the day, having a federal contract is not a right and comes with significant responsibilities for those employers to be in compliance with basic labor laws,” he said.
One former head of the Labor Department’s Wage and Hour Division said that if he were still working for government, he would convene a team of state and federal regulators to immediately start monitoring government contracts. He said regulators must make referrals between agencies about possible misclassification.
George Friday Jr., who oversaw several states on the West Coast, including California, said he wasn’t surprised by McClatchy’s findings. He said they underscored the need for aggressive and extensive work by regulators on the federal, state and local levels. Friday said that agencies are notoriously understaffed and that combating the issues laid out in “Contract to Cheat” will require resources.
“It is a tremendous amount of work,” said Friday.
Some state leaders pledged to try to rid their communities of misclassification. And some business and labor groups said they plan to use McClatchy’s investigation as they prepare for upcoming legislative sessions.
In North Carolina, where McClatchy found some of the highest rates of misclassification, Gov. Pat McCrory, a Republican, pledged his support of a bill that would make the practice a violation of the law with criminal penalties. Attorney General Roy Cooper, a Democrat likely to run for governor in 2016, said he has committed lawyers in his office to figuring out how to help revenue officers and housing officials see whether they can address the apparent misclassification on government projects reviewed by reporters in the state.
The series was to be part of discussions this weekend held by the regional council for Georgia, South Carolina and North Carolina of the United Brotherhood of Carpenters, the organization said.
Gregg Warren, president of a Raleigh, N.C.-based housing nonprofit called DHIC that develops affordable housing projects, said he’s meeting with his general contractors and some subcontractors next week to see what can be done. He raised the possibility of issuing mandates that all workers be employees unless proven otherwise. But he said that would be difficult for his nonprofit to enforce. What is necessary, he said, is stronger enforcement at the state level.
“It doesn’t seem like there is any oversight going on with this,” Warren said.
Carol Bowen, vice president of government affairs for the Associated Builders and Contractors Florida East Coast Chapter, said she plans to pass out copies of the McClatchy series next week at a strategy meeting to prioritize goals and needs to take to elected officials.
The group wants lawmakers to find ways to stop bad actors who undermine their members, she said. But Bowen also wants lawmakers to be careful not to overreact with legislation that would add onerous paperwork for honest businesses. She said miscreants won’t follow the rules anyway.
“Rules and regulations only impact those who follow rules and regulations,” she said.
Danielle Larson, past chairwoman of the Masonry Association of Florida, hopes the series can serve as evidence that general contractors need to be held more accountable for their subcontractors.
“I don’t blame people for staying alive,” she said. “I know what it’s like to struggle every day. But you drive around and see these guys with new trucks and fancy equipment and you know what’s going on.”
Don DellaMea, owner of Spain Construction, a home remodeling company in Charlotte, N.C., said his company is routinely beat out of jobs. He’s certain his competitors’ advantage comes from labor practices such as misclassifying employees as independent contractors. DellaMea said the industry has got to police itself better, and regulators need to start cracking down. Customers, too, bear responsibility, DellaMea said.
“It’s a shame the consumers are also part of the problem. They are willing to tolerate it. They are willing to look the other way and take a gamble to save $5,000,” DellaMea said.
Rick Rothacker of The Charlotte Observer contributed. Locke writes for The News & Observer and reported from Raleigh, N.C. Ordonez reported from Washington.