Zurik: A billion dollar blueprint for a taxpayer rip-off

Updated: Dec. 28, 2015 at 9:00 AM CST
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NEW ORLEANS (WVUE) - Taxpayers have enough of a burden on their hands. Between state and federal taxes, FICA and other withholdings, our paychecks all get a little thinner.

That's why the labor practice we're focusing on in this investigation is like stealing food from your family's table.

Labor misclassification allows businesses to cheat taxpayers in Louisiana out of hundreds of millions of dollars. But the state has been ignoring these costly violations for years.

"I haven't heard of a major prosecution… I haven't heard about it in the state of Louisiana," says Tulane law professor Joel Friedman. "It's not a secret. So someone has made a decision, for good or bad, not to enforce these extensively."

Let's draw this picture as an example. A school is built by a contractor. The contractor hires subcontractors to build that school. The subs hire those carpenters, laborers and painters.

Our investigation has found that many of these subcontractors are improperly labeling those workers as independent contractors instead of employees.

"It's payroll fraud, clearly," says Jason Engels of the state's carpenters union. "It's payroll fraud as a business plan."

The business model is called misclassification of employees and, according to our research in Louisiana, it costs taxpayers annually at least $250 million.

Here's why it costs you money.

If an employee considers that carpenter or painter an independent contractor, they're not deducting state or federal taxes, Medicare or Social Security or unemployment insurance. In many cases, it means money meant for the state and federal government is never paid.

"Payroll fraud misclassification is pretty much the business plan on every job site in the state of Louisiana," Engels tells us.

He calls it a business plan because the businesses know that they're rarely caught in the act, and breaking the law gives them a 30-percent savings.

"Calling somebody an employee almost invariably makes them more expensive to the employer," Friedman says.

Louisiana has strict guidelines on who may be considered an independent contractor. For one thing, state law says an independent contractor has to be free from control. Friedman says the question to answer is, "Is the worker economically dependent on the employer or is the worker working for themselves?"

Also, the worker has to perform a service the company normally doesn't provide. "It's something different than what is the essence of the entity's business," Friedman says.

And the worker has to be engaged in an independent business or profession.

Friedman says, "If one of these is not true, then you're an employee."

📷FOX 8 News spent six months reviewing hundreds of thousands of pages of records, inspecting documents from 30 different public entities. What we found: Misclassification of employees is widespread.

For many public construction projects, contractors have to file certified payroll records - reports that show how much they're paying employees. When we reviewed those records, we found more than 1,500 employees who were possibly misclassified.

When someone is properly classified as an employee, their payroll record clearly shows taxes being withheld. But for a misclassified worker, the gross pay and the net pay are the same on the payroll report.

In many cases, the contractor actually acknowledges this by giving the workers a 1099 form - an IRS form for independent contractors.

We went around to several construction sites in the metro New Orleans and Baton Rouge areas and found workers on the job, receiving those 1099 forms and labeled as independent contractors.

By labeling someone an independent contractor, it's up to the employee to pay taxes. And according to the IRS, 56 percent of independent contractors nationwide fail to fully report.

"I don't think this is an illegal immigration problem," says Adam Bermudez, who owns a temporary staffing company. "I think this is an illegal business practice or an illegal business problem."

Until a few years ago, Bermudez provided workers to the construction industry. "What happened was we became noncompetitive in that industry," he tells us. "Basically our costs were about 30 percent higher than those other companies. So we basically got out of the business. "

Bermudez says he followed the rules: paid taxes, Medicare, Social Security, everything that was required. Many of his competitors did not.

"It creates an uneven playing field for us," he says. "But there's just so much money being lost to the state. We're having budget crisis and I think there's pretty easy money out there for them to go get."

The Louisiana Workforce Commission helps investigate misclassification.

"We need them to know that we're watching," says Curt Eysink, LWC's executive director.

After years of little enforcement, LWC officials say they want to crack down. Last year, they identified 12,000 misclassified workers - they couldn't tell us how many came from the construction industry, though.

Labor misclassification appears to be most prevalent in the construction, janitorial, personal care, and hospitality industries. And it used to be that the state could only do random audits across all industry subsets. That's changed, so the state can now focus on specific industries and/or offenders.

📷That has made a difference. The Workforce Commission went from finding 283 misclassified workers in 2010 to 12,782 last year. The Workforce Commission expects to match or exceed that number this year.

But many insiders in the industry say they haven't seen any change; some say the problem now is worse than ever.

"I want them to call us up or to send a report in or email us or go to our website," Eysink tells us.

Even with tips, tracking down possible law breakers can be difficult.

CMC Drywall Company works out of the back of a Kenner insurance business. That company helped build the University Medical Center, the BW Cooper housing development, New Orleans East Hospital, Sanchez and Rosenwald centers. We found 146 CMC workers possibly being misclassified.

On three different visits to CMC's office address, the owner wasn't there. He didn't return our calls.

In New Orleans, we went to the office of Hahn Enterprises, which appears to have misclassified workers. A worker there, who eventually identified herself as Tania Hahn, declined to take our questions but suggested we call her to schedule an appointment. We're still waiting for that callback.

When we went to the business address of another subcontractor - a home in Kenner, it turned out - a person there gave us a bad phone number for the business owner.

A Baton Rouge contractor we spoke with seemed unaware of the law. "I don't know, all I did was construction work," he told us. "That's why I hired an accountant."

The big contractors we looked at appeared to be following the law. But when they hire subcontractors, it's some of those businesses that commit this fraud.

Engels suggests, though, that the general contractors know what's going on. "It's just plausible deniability," he says. "I mean, I think everyone everybody turns a blind eye to what's happening."

The Carpenters Union considers the Workforce Commission a good partner in the fight against labor misclassification. And Louisiana is not unique - misclassification takes place around the country. In North Carolina, for instance, a document shows labor misclassification on a project in Charlotte. In Mississippi, a company actually filed suit to prevent us from getting records from a housing project in south Mississippi.

"I am imagining that the classification is not unintentional," Friedman says, "that it's done for the purpose of avoiding taxation."

Federal authorities are supposed to keep an eye on labor classification on the work site, too, under the Fair Labor Standards Act. In fact, Labor Department authorities say the spread of misclassified labor is growing, and they recently tightened their own internal guidance for how to properly and legally define independent contractors.

So when we draw a larger picture, including the entire country, the scale of the problem grows by billions. It's not a simple plan, but the picture is pretty clear: a blueprint that allows some businesses to make billions of dollars by breaking the law.

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