An unlikely alliance between business and labor advocacy groups is pushing business-friendly Texas to adopt state and local reforms in order to bust private companies that cheat on taxes owed to the federal government on public projects.
The contracting scheme is used by construction companies that mislabel workers as independent contractors, rather than employees, to avoid paying taxes on them. A McClatchy investigation found that more than 150 contractors treated workers as independent contractors on 30 publicly funded projects throughout Texas from 2009 to 2013. The scheme cost taxpayers more than $1.2 billion a year in lost federal income, payroll and unemployment tax revenues, the investigation found.
“We are trying to work together to change this industry,” said Carlota Garcia, who was among 50 demonstrators at a summer rally that urged the Austin public school system to improve job conditions for workers on public infrastructure upgrades.
Worker advocacy groups say they support the movement because not paying workers and payroll fraud often go hand in hand. They say that a contractor who doesn’t pay his workers is also likely to cheat on taxes.
Business is an unusual partner in such a crusade, according to the worker advocacy groups, but the issue is hitting their pockets because companies that misclassify workers can do projects more cheaply, outbidding competitors who don’t cheat.
Brian “Andy” Anderson, the president of a rebar company in Mesquite, a surburb east of Dallas, said that some of his competitors used the tactic to win jobs. Cheaters are able to come in with bids that are likely going to be 20 percent below his, he said.
“It’s become my battle cry,” said Anderson, a regular at the state Capitol in supporting laws that force companies to play by the rules. “My competitors have an unfair advantage when they cheat.”
The issue has gotten popular enough to enlist the support of a who’s who of high-profile developers, including Apple Inc. and Trammell Crow in Austin. The lawmaker who led the charge to create the first state law aimed at busting tax cheaters, enacted Jan. 1, was one of the industry’s very own, a roofing contractor.
“It’s an unspoken thing in our industry, but we all know how the game is played,” said former state Rep. John E. Davis, a Houston Republican who retired from the Legislature. “Certain contractors, they doctor books and act like they are complying but they are not.”
The two largest construction trade groups representing Dallas and Fort Worth government contractors also have endorsed the new law, which fines contractors $200 for every employee improperly treated as an independent contractor.
Cracking down
All across Texas, city governments are passing ordinances to prohibit unscrupulous contractors from getting jobs. El Paso is expected to vote on a proposal to create a city registry of local employers that are found to have violated the law and bar them from future public contracts. Houston has a similar ordinance in place. Austin adopted a measure to require independent electrical contractors to be licensed before starting work for the city.
“Texas has a group of contractors in it that haven’t gone over to the dark side yet,” said Matt Capece, a lawyer with the United Brotherhood of Carpenters and Joiners of America, based in Washington. “There seem to be more people in the construction industry in Texas that want to police the industry.”
Under Davis’ law, one contractor had already been penalized by early summer, according to the Texas Workforce Commission, which is expected to issue an enforcement report in November.
Texas’ treatment of tax cheaters also forced at least one general contractor to try to beef up internal monitoring. A Cleveland-based general contractor, The NRP Group LLC, hired additional staff to scrutinize the payroll on a Fort Worth affordable housing project a few miles from downtown.
T. Richard Bailey, a partner with The NRP Group, which is overseeing subcontractors on the $15.7 million Woodmont Apartments, said he wanted no part of being on a state blacklist.
“We are certainly aware of the $200 penalty per person that is not classified,” said Bailey. His company hired full-time staff three years ago to ensure compliance after it heard a crackdown was coming.
Payroll records obtained by McClatchy on the Woodmont showed that 100 out of 281 workers on the project _ about 35 percent _ were treated as independent contractors. Asked about the numbers, NRP officials said that some of project’s subcontractors hired independent contractors who brought their own tools to the job site and that the U.S. Housing and Urban Development Department had approved its paperwork.
After the animated rally in front of the Austin school district’s offices, the board of education voted in June to require that contractors pay prevailing wages. The policy covers all construction projects in the school bond program.
The Austin licensing ordinance came about because of clamoring from local business and union leaders, said Chris Wagner, the business manager for the International Brotherhood of Electrical Workers Local 520 in Austin.
Union electricians disguised as workers were dispatched in the past few years to investigate the issue at several commercial high-rise apartment projects under construction in the heart of downtown Austin. They found that the private companies were cheating on taxes by identifying laborers as independent contractors. Union and nonunion businesses joined to file complaints with state and federal authorities, Wagner said.
The scrutiny is even more intense on publicly funded jobs, Wagner said.
“Over the last 10 years, we’ve really focused hard on making sure that when companies are bidding or trying to land publicly funded jobs, that we’re out there letting them know that they’re being monitored and we’re going to be watching,” Wagner said.
“We’ve turned a lot of them in, and there’s been a lot of them busted for not paying the right wage rates for publicly funded jobs and violating IRS laws by not taking out taxes,” Wagner said.
Critics want changes
Some in the industry have criticized reforms such as the $200 penalty as not being tough enough. Critics say few contractors will be caught and that a $200 fine won’t deter those who will get caught.
Another weakness of the law is that it applies only to government contracts – it doesn’t touch commercial projects, critics say.
What’s more, violators can’t be caught unless someone complains, said Anderson, the owner of the rebar company in Mesquite.
“If I could make one-tenth of 1 percent more, I would hire 100 people to just go after this stuff,” Anderson said.
A better change might be a program that sets an expectation for developers to raise industry standards, said Stephanie Gharakhanian, the research and policy director for Workers Defense Project. The Better Builder program, which Workers Defense Project established in 2011, has several Austin developers on board, including Apple Inc. The companies have signed an agreement as part of economic development policies that Travis County, Texas, and the city of Austin adopted last year.
“It implements change at the top,” Gharakhanian said. “The developers are aware of what is broken. They have to see that it is in their best interest to work to improve the industry and to raise standards. That’s why it is so powerful.”
The agreement encourages companies to allow trained monitors from the workers’ group to inspect payrolls and work sites for examples of tax cheating. It also sets the expectation that companies will provide safety training and workers’ compensation protections.
As the monitors of hundreds of payroll documents, group leaders also can help developers collect compensation data that meets federal requirements.
“We identify a lot of it (tax cheating), and we work with the developer and various subcontractors to cure misclassification when we find it on site,” Gharakhanian said.
It might be time for the industry to clean house, said state Sen. Sylvia Garcia, a Democrat from Houston who co-sponsored the $200 penalty bill with Davis.
Texas has just begun to try to weed out unscrupulous contractors, she said.
“At least we are getting into the first steps of tackling this issue,” Garcia said. “This is not the end of the story.”