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Tax Fraud Days of Action 2022: Kentucky

Indiana Kentucky Ohio Regional Council of Carpenters Representatives spoke with state and local officials on April 13th and 14th to learn more and speak out about construction industry tax fraud in Kentucky. Events were held by IKORCC across the three states and sponsored by the United Brotherhood of Carpenters across the United States and Canada.

More than 50 Senate and House Representatives stopped by our setup in the capitol building in Frankfort on April 13th. The statehouse was in session and full which opened the door for IKORCC to make new introductions with lawmakers who were unaware of construction industry tax fraud were made. All 200 meals and toolboxes were handed out.

On April 14th, over 25 officials including area mayors, State Representatives, judges, code enforcement officers, tax clerks, and local business owners attended a lunch and learn about tax fraud.

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Tax Fraud Days of Action 2022: Ohio

In four events across the state, regional legislators visited the Indiana Kentucky Ohio Regional Council of Carpenters Training Centers on April 12th and 13th to learn more and speak out about construction industry tax fraud. Events were held by IKORCC across the three states and sponsored by the United Brotherhood of Carpenters across the United States and Canada.

On April 12th, the IKORCC held events in Rossford and Monroe.  On April 13th, events took place in Richfield and Columbus.  All four events brought in legislators from both sides of the aisle some with little knowledge of the dangerous practice in the construction industry. Leer más

‘Worker misclassification’ seen as growing threat by contractors, unions in the Region

Andrew Steele andrew.steele@nwi.com, 219-933-3241
Sep 3, 2017 Updated Sep 8, 2017

As companies strive to increase profits amid a changing economy and consumer habits, the discussion often centers on challenges posed by the “gig economy” and its impact on work and employment.

Upstart companies like the Uber ride-sharing service tend to be the focus of concern; recent reports of such companies’ drivers speaking out against perceived company efforts to trim their pay bear this out.

Online story on NWI Times

But the growing use of short-term contracts in industries such as construction is threatening traditional employment in a way some say has reached a critical phase.

The fight is over what’s commonly called “employee misclassification” — or payroll fraud, in the view of unions and contractors. It involves an employer hiring workers as freelancing contractors who should be full-time employees, thereby allowing the employer to avoid paying payroll taxes, and worker’s compensation and unemployment insurance premiums, among other costs.

“It’s a problem that’s been around for many decades,” said Dewey Pearman, executive director of the Construction Advancement Foundation of Northwest Indiana. “But it’s becoming epidemic.”

Officials with the Indiana/Kentucky/Ohio Regional Council of Carpenters visit job sites frequently to talk to carpenters, said Scott Cooley, senior representative at the union’s local headquarters. He said he often talks to contract workers who he believes should be formal employees.

“We run into it all the time,” Cooley said. “It’s just a regular occurrence.”

Some workers in question receive a federal 1099 form at the end of the year, but others aren’t reported at all, and are just paid cash for their work.

‘No magic’ in defining employment

Classifying employees properly isn’t an exact science. It involves several variables, including the degree of company control over the employee; the financial arrangement, including who provides tools and supplies; whether there are benefits such as a pension and insurance; and whether work performed is a key component of the business’ activity.

The Internal Revenue Service lists 20 factors to consider, and states in its guidance on the matter that “there is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor.”

But contractors and the carpenters’ union say some building projects are rife with contract workers who clearly are misclassified: their hours and duties are assigned by their employer, their tools and supplies are provided, and their work is a core function of the company — all factors that generally make one an employee, not a contract worker, in the eyes of the law.

Quantifying the problem

A 2010 study commissioned by the Indiana Building & Construction Trades Council and the Indiana, Illinois, Iowa Foundation for Fair Contracting argued that a company’s use of these workers gives employers who use the practice a decided, but unfair, competitive advantage.

The report, by economists from the University of Missouri-Kansas City, estimated 72,299 employers, 8,052 of them in construction, had misclassified employees in 2008. It said 15.3 percent of employees were misclassified, totaling 377,742 workers, of whom 24,323 were in construction.

The practice also has implications for governments at all levels, the study found. For the state in 2008, $30.4 million in unemployment insurance taxes were lost, $2 million of that from the construction industry.

Between $134.8 million and $224.6 million of income tax revenue went unpaid, with $10.6 million from the construction industry.

Local income tax losses statewide totaled $91.2 million, $7.2 million of that from the construction industry, according to the study. Also, $26.3 million of worker’s compensation premiums were not properly paid, with $4.6 million of that from construction, according to the report.

Ultimately, the University of Missouri report estimated the costs to the state of Indiana, at a high end, of about $406 million annually.

But a precise evaluation of the cost to government is elusive. Several state agencies charged by the state’s Pension Management Oversight Commission with doing a study of their own in 2010 disputed the methodology and assumptions of the university study.

They estimated 8 percent of workers, not 15.3 percent, are misclassified, and that the state loses $14 million to $20 million annually in tax revenue, “of which (the Department of Revenue) could be expected to recover a substantial portion.”

The report, by the state departments of Workforce Development, Labor and Revenue and the Workers’ Compensation Board, also questioned the impact on the workers’ compensation and unemployment insurance system.

Finally, the report’s writers argue that misclassification often is an innocent misunderstanding of the law. “Heavy-handed penalties will have little impact on these employers,” the report concluded.

But contractors and unions dispute these conclusions, saying the effect on their work is clear and stronger enforcement is key. When a state legislative study committee investigated the issue last year, more than 40 contractors wrote letters contending that the misclassification problem has grown to the point that it threatens the viability of construction companies that abide by the rules.

The companies included Northwest Indiana’s Berglund, Gough, Larson-Danielson, Precision, Prodigy, Solid Platforms, Specialty, Superior, and Pangere.

Misclassification “gives cheating contractors a 30 percent advantage in bidding, undermining the legitimate contracting community through low-ball bids that do not represent the cost of conducting lawful business,” wrote Timothy Larson, president of Larson-Danielson Construction Co.

Enforcement elusive?

The carpenters’ union recently had success when it filed a complaint with the National Labor Relations Board regarding a LaPorte hotel under construction. The complaint alleged that misclassification of workers impeded their ability to act collectively and form, or join, a union.

The complaint resulted in a settlement requiring the contractor to reclassify the employees and to inform them of their rights under federal law. But union officials called that settlement “a slap on the wrist” and, along with the contractors, have urged greater enforcement.

“There are laws on the books right now; the problem is they’re not enforced,” Cooley, of the tri-state carpenters’ council, said.

Efforts on the state level have included a law that took effect in 2010 requiring the Labor, Workforce Development and Revenue departments, along with the Worker’s Compensation Board, to share information on possible worker misclassification in the construction business.

The state also maintains an email address to receive tips, wagehour@dol.in.gov.

But further efforts to bolster enforcement have met with resistance, according to the state senator behind a bill proposed in the last session.

“We’ve got all these different departments, and they’re supposed to share this information, but it doesn’t always happen,” said Sen. Karen Tallian, D-Ogden Dunes.

Tallian authored a law that would have created a Payroll Fraud Task Force made up of representatives of the four state agencies. The law would have required hiring an investigator dedicated to investigation and enforcement. The bill had one committee hearing but never received a vote.

“We recognize there’s a problem. We just don’t know how big the problem is, and we don’t know for sure how to fix it,” said the Pensions and Labor Committee chairman, Crawfordsville Republican Phil Boots, when he concluded the Feb. 1 committee hearing on it.

Tallian said the state government has downplayed the problem and the state agencies’ potential to address it.

“It keeps getting worse,” Tallian said. “This bill will be filed again. We’re going to keep pushing it.”

Contractor at University of Tennessee Project to Pay Over $300K for Hiding Payroll

Mid-South Regional Council of Carpenters:

A contractor working on the University of Tennessee’s Strong Hall construction project will pay more than $300,000 in fines for labor violations.

JAC Jack Construction LLC, a Knoxville-based labor provider, has agreed to pay a penalty of $336,987 assessed by the Tennessee Department of Labor Bureau of Workers’ Compensation (BWC).

The penalty is based on over a year’s worth of work at the University, where labor was provided for Proffitt & Sons, Inc.

In the settlement agreement, JAC Jack “understated or concealed …[its]…payroll, number of employees and/or appropriate classification of employees in an effort to avoid payment of proper workers’ compensation insurance premiums.”

Read the settlement agreement, below.

The Mid-South Carpenters Regional Council consistently tries to prevent this type of payroll fraud by calling attention to the problem. Here’s a background article about the effort surrounding JAC Jack and the UT project, and why it’s so dangerous to a community.

“Those workers were exploited, immigrant labor,” said Mike Boner, executive secretary-treasurer of the Regional Council.

Many contractors in Tennessee, such as Proffitt & Sons, get most of their workers from labor brokers.

“These labor providers aren’t name-brand companies,” said Boner. “They’re usually a guy with a cell phone that can round up dozens or even hundreds of workers. Then the labor brokers pay the workers off the books. We call that ‘payroll fraud.’”

The use of labor brokers is a serious problem in the construction industry because workers lose important workplace protections like workers’ compensation benefits, unemployment insurance and overtime. In addition, employment taxes for Social Security and Medicare are not paid.  That enables the cheating contractor to underbid law-abiding businesses by up to 30 percent.

“All of this cheating hurts every one of us by driving down our wages and driving up our taxes and insurance costs,” said Boner. “The fine from the BWC is large and should be a warning to all of the other companies out there who use the same practices.”

File: JAC Jack Settlement TNBWC 3-10-17.pdf