Residential construction industry built on ‘payroll fraud’ model

WorkdayMinnesota.org has completed a several months long study on wage theft in Minnesota. The problem is pervasive and widespread throughout the state in many types of work. Two of the studies focused on wage theft in non-union sectors of the building and construction trades. This article addresses the problem in residential construction. 

Jose Ramirez had never heard the term “wage theft,” but he knew he was being cheated when a roofing subcontractor refused to pay him.

“We finished a couple houses, roofing houses, and we tried to collect the money and the guy said, ‘I haven’t gotten paid by our boss,’” he recalls. “That was a big project. I mean, we were shingling one house, putting back shingles, moving to the next one, and eventually there was two of them where I did not get paid. I told the guy, ‘That’s it. I can’t keep working until you pay me those two houses.’”

“So they stop answering the phone, you start chasing them for the money, and then suddenly, they disappear . . . and there you go – you got two weeks without pay . . . So you have to figure out how you’re going to support your family.

Today, Ramirez is one of the lucky ones. After seeing a billboard advertising the carpenters union, he called and signed up. He spent several years with a reputable contractor and just recently became an instructor in the training center operated by the North Central States Regional Council of Carpenters.(link is external)

Looking back, Ramirez realizes that not getting paid to roof two houses was just the tip of the iceberg. He was being cheated every day on the job, forced to work long hours without overtime pay. Often, he never got a paystub to track whether or not he was being paid for all the hours he worked.

Fortunately, he did not get injured on the job. Even though construction employers are required to carry workers’ compensation insurance, untold numbers of injured workers have been fired, left to try to get medical help on their own.

“Back in the day, I didn’t know that you had those rights,” said Ramirez. “I have friends who still work the same way. Depending on the situation that they have, some people don’t think they have a choice but to work that way. People have to make a living.”

Tens of thousands of construction workers are victims of wage theft in Minnesota ever year, but no one knows the exact number. Some of the workers are undocumented and afraid to come forward. Many, regardless of their background or citizenship status, simply don’t know that they are being cheated.

Predominant business model

Burt Johnson, general counsel for the North Central States Regional Council of Carpenters, calls it “payroll fraud” and says it’s “the predominant business model in the residential construction market in Minnesota” for not only single family homes, but also apartment buildings, housing developments and assisted living/senior housing projects.

The residential construction market is almost entirely non-union, so workers lack the protections provided by a union contract.

“Many workers are not an employee of anyone and are paid either cash or by some type of direct check. In multi-family construction, it’s possibly over 50 percent of the market that ends up being paid that way,” he said. “Typically, about 40-50 percent of the cost of a construction project is labor. If you add that all up, it’s hard to say exactly what the impact of payroll fraud would be on the construction industry, on the economy of the state of Minnesota, but it’s no doubt in the tens of millions of dollars, likely over $100 million.”

A significant problem in the industry is misclassification of workers as independent contractors. A 2007 Legislative Auditor’s report(link is external) found that at least 15 percent of construction employers have misclassified workers as independent contractors, with the percentages higher in some aspects of the industry, such as roofing and drywall work.

In 2012, the state Department of Employment and Economic Development(link is external) determined gross wages reported in the construction sector to be $5.2 billion and increasing as the economy strengthens. That means the percentage of payroll affected by just the misclassification problem runs in the hundreds of millions of dollars.

A 2013 DOLI report, “An Evaluation of the Contractor Registration Pilot Project and the Misclassification of Workers in the Construction Industry,” (link is external)found that, “Misclassification adversely impacts businesses, workers and the economies of Minnesota and the U.S. Misclassification prevents workers from benefiting from protections that are provided to employees by law and creates a competitive disadvantage for contractors who comply with the laws relating to workers’ compensation insurance, unemployment insurance and tax withholding.”

Federal law requires that hourly workers, including those in construction, receive overtime pay of 1.5 times their hourly wage for all time worked over 40 hours in a week.

Employers get around the law by saying their workers are independent contractors and using a complicated system of subcontracting to disguise the employment relationship, Johnson said. Many companies doing residential construction depend on labor brokers to bring in workers.

This scheme “enables the contractor to look the other way when the employee is working 10, 12 hours a day, but being paid at a set hourly rate no matter how many hours in a day that they work,” he said. “That contractor argues, ‘Well, they’re not my employees, they’re the employees of this labor broker.’ The workers are being exploited in that scenario, no doubt about it.”

Who benefits?

Jose “Joe” Navejas, a union representative for Roofers Local 96,(link is external) fields numerous phone calls from workers who have been victims of wage theft.

“I couldn’t put a name or number on it, or a price on how much money it is, but it is a big problem,” he said. “You know, there are some guys that, they call me and say, ‘This guy owes me $8,000 for a house, this guy owes me $10,000, this guy owes me $15,000 cause I have two houses he hasn’t paid me.’ So it’s hard to tell …”

The scheme clearly benefits the general contractors and the project developers, Johnson and Navejas agree.

“The guy that gets the original contract gets all the money without even touching a nail or a shingle,” said Navejas. “So there’s like three or four middlemen, when it comes down to it. The worker that does the work really doesn’t get paid what he’s supposed to get paid.”

There is also a racial dimension to the problem.

For example, “we see drywall contractors who are owned by, and employee supervision, that are primarily white,” notes Johnson. “We see the workers that are performing the work are primarily Latino and primarily from a different country. It is a discriminatory business model, not just a model that’s intended to deprive the worker of overtime. Misclassification of the employee is a means of discrimination against workers on the basis of race and on the basis of national origin.”

Navejas witnessed such a situation in 2009 when a new roof was being installed on Target Center in downtown Minneapolis. The contractor employed a daytime crew, all white, who were being paid the legally required wages and benefits. The contractor also hired a nighttime crew of Latinos and one African-American who were paid a lot less and worked in highly unsafe conditions, he said.

After Navejas presented video of the nighttime work to the City Council, pressure was put on the contractor to resolve the situation. But the fact that exploitation could occur on such a high-profile project indicates the extent of the problem, he said.

State officials and union representatives say the solution lies in a combination of education, organizing and better enforcement.

Minnesota has instituted a requirement that contractors register with the state and provide proof that they have workers’ compensation and unemployment insurance. The 2013 DOLI report recommends the department strengthen the verification process and boost enforcement beyond the two investigators currently devoted to misclassification cases.

Building trades unions, sometimes in concert with worker centers, are educating people about their rights.

And the carpenters union is actively organizing workers who have been victims of wage theft, Johnson noted.

The current system benefits no one but the people at the very top, he said.

“When workers are given a choice between being an employee, being covered by workers’ compensation, having overtime pay, getting benefits, they opt for that. They opt to be employees,” Johnson said. “They opt to be covered by the law.

“They typically don’t opt for a model where they’re working longer hours, where the only solution to ‘Do you want to earn more money?’ is ‘Sure, you can earn more money. Why don’t you work four more hours in a day? Then you can earn more money.’”

You can read the entire Special Report on WorkdayMinnesota.

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