Regulators blew chances to bring labor scofflaws in line

Earl Devaney served as the Obama administration's top official for preventing fraud and misuse of federal stimulus funds. Around the nation - in plain sight of regulators - thousands of companies avoided state and federal taxes, cheated vulnerable workers and undercut law-abiding competitors by calling workers "independent contractors."
Earl Devaney served as the Obama administration's top official for preventing fraud and misuse of federal stimulus funds. Around the nation - in plain sight of regulators - thousands of companies avoided state and federal taxes, cheated vulnerable workers and undercut law-abiding competitors by calling workers "independent contractors." MIAMI HERALD

Earl Devaney carries himself with the force of an oncoming bus, intimidating without uttering a word. A onetime small college linebacker and Secret Service agent, he exposed the underbelly of money and politics in Washington.

As an inspector general, Devaney carried a big stick, helping to take down Jack Abramoff, the politically connected lobbyist who went to prison for his bribery schemes. So it made sense that President Barack Obama put him in charge of hunting those who might make off with tax dollars from the $840 billion stimulus bill in 2009.

When he took charge, Devaney wasted no time going after phony contractors. In less than two years, his investigators opened more than 1,400 cases of abuse, fraud and waste.

But through all of that oversight, he overlooked something.

A McClatchy Newspapers and Miami Herald investigation into government-funded construction projects found a pattern of tax cheating by companies that exploited workers and undercut honest competitors.

Cheaters across the United States used a scheme that was startling in its simplicity: wrongly treating employees as independent contractors to avoid paying taxes. Five years later, Devaney acknowledges that his group, working at the top levels of the Obama administration, wasn’t paying attention .

“Everybody knows it’s a problem. It’s sort of a dirty little secret,” Devaney said in an interview. “But the resources really aren’t there to enforce it, and I suspect the bad guys know that.”

Exactly how much tax revenue went uncollected on stimulus projects isn’t clear. But this much is: The federal government enabled businesses bent on breaking its rules. While government officials controlled the purse strings, they let companies ignore rules that regulators have spent their careers enforcing.

In Florida, the issue of misclassification, as the practice is known, was not even on the table. Florida's stimulus “czar,” Don Winstead, who served as a special advisor to then-Gov. Charlie Crist in 2009 and 2010, said federal officials presented him with a laundry list of priorities for his office. But he says he never heard a word about independent contractors.

“I don't recall anyone raising issues about people being classified as employees,” Winstead said.

Local housing agencies from Key West to the Palm Beaches said they had little knowledge of how the scheme worked and no idea that they could have been policing it. Even local officials who were aware of the problem said they didn’t have the resources to fight it.

In Washington, Devaney was the public face of stimulus oversight, but he was one of an army of leaders who allowed the pervasive labor problem to persist unchecked for years.

The Herald’s and McClatchy’s yearlong investigation found that state and federal agencies tasked with distributing taxpayer money did little to ensure that the companies cashing in followed the law. Workers were denied protections, taxpayers footed the bill and lawful competitors foundered.

“It’s the Wild West. It’s anarchy,” said Ross Eisenbrey, a former labor official who is vice president of the left-leaning Economic Policy Institute in Washington.

Lifeline in hard times

Many companies teetered on the brink of insolvency during the recession. Some found refuge in taxpayer-funded stimulus projects.

Many construction firms that won the bids had been misclassifying for years — they brought their bad habits with them onto government jobs.

Government regulators were no match for the cheating companies.

Devaney had $84 million to run his office from a whole of more than $350 million also divided among the Government Accountability Office, inspectors general and other agencies to dig out corruption and waste. But misclassification appeared to be on no one’s radar.

In Florida City, for example, regulators turned a blind eye as a third of the companies hired to renovate Southpoint Crossing, a weathered, subsidized housing complex with 123 units, treated nearly half of the 154 workers on that job as independent contractors.

Russell Benford is the Deputy Mayor of Miami-Dade County and is acting director of the county’s Department of Public Housing and Community Development, which reviewed and signed off on contractors’ certified payroll records at Southpoint Crossing. Benford said the agency was responsible only for ensuring that contractors met the standards of the federal Davis-Bacon Act, which ensures that workers receive prevailing wages, overtime payments and other benefits.

He said the department has no responsibility to prevent employers from misclassifying their workers.

Companies face little risk when they treat employees as contractors, and they know it. They were so unconcerned about being caught that they filed payroll records laden with fabrications. Bosses listed invalid addresses, fake Social Security numbers and the names of laborers who told reporters they had never worked on the projects.

Questions went unasked. The records, all on paper, were dumped into boxes and cabinets and never shared with investigators who could have taken action.

The federal government has a history of continuing to do business with companies that cheat on their taxes. And that didn’t change with the stimulus bill.

Many agencies have a part to play to ensure that tax dollars aren’t misspent on government projects. The U.S. Department of Housing and Urban Development handed out billions without heeding major labor laws or revenue codes. The U.S. Department of Labor rarely stepped in, nor did Internal Revenue Service officials. The agencies didn’t talk to one another.

The burden of that inaction fell on workers.

Walter Vanderhorst worked for a company replacing windows and doors at the Dixie Manor Apartments, a public housing complex in Boca Raton. A Navy veteran, Vanderhorst earned $12.50 an hour, even when he put in overtime.

His employer, the Hayes Building Company of Fort Myers, had classified him as an independent contractor. But Vanderhorst said he was not self-employed and that his work on the project was closely supervised by a company foreman. “I’m not an independent businessman,” Vanderhorst said. “I was a full-time worker. A laborer.”

The company did not respond to a request for comment.

The RAT Board

As part of the Recovery Act, Devaney assembled a team of 29 inspectors general from federal agencies as part of his work on the Recovery Accountability and Transparency Board, known as the “RAT Board.”

Devaney was facing steep demands. Money needed to be out the door yesterday. The public needed a way to track the money.

On a trip to Washington, D.C., this summer, Devaney met McClatchy reporters to talk about misclassification. Sitting at a booth near the back of a trendy cafe, Devaney thumbed through payroll reports listing hourly laborers as independent contractors. He shook his head.

Misclassification deserved more attention than it got under his watch, Devaney acknowledged. But he has worked in government long enough to know that there are never enough watchdogs in enough places to do all that needs doing.

“There were so many other possible frauds, especially with recovery money, that it would have been, I don’t know, ninth or 10th on the list,” said Devaney, who now lives in the Fort Lauderdale area.

To stop misclassification, Devaney said, he would have needed “an army of investigators” he didn’t have. McClatchy found, however, that no one appeared to even talk about the problem.

In half a dozen appearances before Congress, Devaney never mentioned the issue. And elected officials didn’t ask, transcripts show. Of 1,553 waste, fraud and abuse investigations into stimulus contracts that Devaney’s Recovery Accountability and Transparency Board is still investigating, none focuses on misclassification, according to the board.

“This never came up,” Devaney said.

Local housing officials and municipal employees didn’t pay attention to whether workers were employees or contractors, interviews with more than 20 of them confirm. Some didn’t even know why it mattered. The federal officials who trained them had not told them to watch out for it.

“Not being in the construction industry, I’m not familiar with those regulations,” said Alan Sullivan, executive director of the Belle Glade Housing Authority. “We left it up to [Palm Beach County officials].”

Other local officials said it simply wasn’t their job.

“This department is not the authority when it comes to classification of employees,” said George Mensah, director of Miami’s Department of Community & Economic Development, which supervised three city projects where companies misclassified workers.

The Florida Department of Revenue does investigate misclassification around the state based on tips from the IRS. The intentional misclassification of a worker is a felony under Florida law. But the department does not review payroll records for HUD projects as a matter of course, spokeswoman Renee Waters said.

The paper trail

The clues are in black and white on a simple sheet of paper.

A few little boxes on the payroll report should list Uncle Sam’s cut of the paycheck. Those following the rules list the taxes they must withhold from employees. Cheaters leave them blank or offer explanations: “employee pays own taxes” or “1099,” the form filled out for tax purposes by independent contractors.

Using the Freedom of Information Act and state public records laws, McClatchy and the Miami Herald gathered tens of thousands of pages of payroll records from construction projects in Florida and 27 other states.

The investigation found that federal regulators rarely see the records that the local officials collect. Only a few local officials can remember anyone from the federal government asking to see them; when officials from HUD did inspect the records, they raised no issues with companies that treated hourly workers as independent contractors.

Some local officials say they’re ill-equipped to monitor labor laws and revenue codes on payroll forms.

“Our housing authority staff doesn’t have that kind of expertise,” said Van Johnson, executive director of the Palm Beach County Housing Authority.

In interviews with McClatchy, officials from housing authorities and local municipalities across the country couldn’t recall getting any guidance from HUD about treating workers as independent contractors instead of employees.

Two sentences in a manual distributed to companies working on HUD projects are the only hint that the agency knows what misclassification is. The message warns companies that the agency reserves the right to refer to the IRS payroll records showing workers without tax withholding.

The threat is empty.

HUD officials in the Atlanta office, which oversees eight states in the Southeast, have referred no payroll reports to the IRS for review, a spokesman said.

Jerry Brown, a HUD spokesman in Washington, said in a statement HUD doesn’t have the authority to monitor or enforce federal tax laws and that guidance provided to local officials is consistent with Department of Labor policy. He said HUD is tasked with ensuring that contractors pay proper prevailing wages, but it does not enforce proper classification of workers as employees or contractors. He said there is no requirement that certified payroll records be transmitted to the IRS.

“HUD involves other agencies on an as needed basis,” he said.

Private projects targeted

Devaney blames a lack of resources and proper training. He also points to a long-standing turf war between state and federal officials. Federal officials have learned not to big-foot locals — “because they might get mad at us.”

And yet when it comes to private projects, the Department of Labor has stepped up its enforcement on misclassification as part of Vice President Joe Biden’s Middle Class Task Force.

Former Secretary of Labor Hilda Solis in 2011 requested $25 million to boost enforcement targeting misclassification. Fourteen states have signed agreements to share more information with the Labor Department’s Wage and Hour Division. Florida isn’t one of them. Obama’s 2015 budget includes nearly $14 million to combat misclassification.

It’s all disconcerting to honest contractors such as Rick Suarez, president of Ready Windows in Hialeah. To win a government job, contractors must either accept a tiny profit or cheat, which many do, he said. But Suarez doesn’t entirely blame the companies. The government, he said, has allowed the problem to fester.

“It’s a system where people have to undercut each other by any means possible to get work,” he said.

At the cafe this summer, Devaney’s brain churned as he thought of all the ways investigators could crack down on misclassification. Devaney is a fixer by instinct. He could see the dollar signs, and how much in revenue could be recovered.

“If you start adding it up as you go across the country,” he said, “it’s a lot of money.”

Evan Benn of the Miami Herald and David Raynor of The News & Observer in Raleigh, N.C., contributed to this article .