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Profiting From Shadow Labor

Others Pay When Subcontractors Avoid Employee Taxes

By Diane Weaver Dunne

August 17, 2009

The state’s two-year crackdown on companies that avoid paying employee taxes and workers’ compensation insurance has resulted in 220 stop-work orders at construction sites across Connecticut.

But a Hartford Business Journal examination of state records, and interviews with employers and workers, shows that the October 2007 law that gave the state labor department authority to shut down work sites serves as little deterrent to companies intent on illegally keeping costs down.

The Journal’s examination found:

• A half-dozen general contractors — whose projects include some of the most luxurious and high-priced construction along the eastern seaboard — have had nearly half of the stop-work orders issued at their sites because subcontractors misclassified workers as independent contractors rather than employees or paid them under-the-table in cash. Those large corporations avoid monetary fines and criminal penalties.

• Connecticut’s enforcement efforts are hindered by a lack of staffing and no provisions in the law for barring repeat offenders from getting private work. The state’s efforts pale in comparison to efforts in neighboring states such as New York and Massachusetts (see sidebar), where many additional enforcement provisions are in place. Connecticut also lacks a comprehensive, interagency collaboration similar to those in the other states.

• A new economic study has found that the costs of worker misclassification may be enormous. Including the underground economy, where employees are paid under-the-table in cash, and expenses for uncompensated medical care, the total cost to “Connecticut citizens jumps to almost $10.5 billion annually,” according to a study by William Alpert, professor of economics at the University of Connecticut. The report was conducted for the New England Regional Carpenter’s Union. The exact cost to businesses that play by the rules has not been quantified.

Nationally, the problem is growing significantly, according to a February 2009 report by the U.S. Treasury Inspector General for Tax Administration. “When an employee is misclassified, tax revenues are not reported or paid and the burden of uncollected taxes shifts to other taxpayers,” the report said.

The law defines an employee as a worker who is subject to the control and supervision of the employer and renders services that are integral to the employer’s business. In that case, the employer must pay workers’ compensation insurance and employee taxes.

All 220 stop-work orders have been issued to subcontractors hired to perform smaller jobs on the project, such as installing tiles or sheetrock. Nearly 41 percent were issued at sites of seven large construction companies.

They are: RMS Construction, Thomason-Stevens LLC, Avalon Bay Communities, KBE Building Corp. (formerly Konover Construction), Briad Group, Newfield Construction Inc. and Fairfield Development.

Two companies on the list, RMS Construction and KBE Building Corp., argue that the list is skewed and misleading. They maintain that they are frustrated with subcontractors who violate the law and that they are doing everything they legally can to ensure the subcontractors comply.

KBE has implemented a subcontractor employee badge program that requires its subcontractors to certify all workers are classified as employees and not independent contractors, and have government documents that ensure that they are legally permitted to work in the United States, said Robert Dunn III, vice president and general counsel for KBE Building Corp. Since its badge program was implemented, Dunn said there were just two additional stop-work orders at KBE worksites. “The problem [with the DOL’s list of stop-work orders] is that it is painting something that we are not,” Dunn said.

Randall Salvatore, president of Stamford-based RMS Construction, whose sites have been the subject of the largest number of stop-work orders in the state with 29, said there is confusion about how workers are classified.

“A lot of [the subcontractors], they are foreign born, and they don’t fully understand the process. They are not bad people. It’s the way they are going about things.”

He said that in all cases, the subcontractors have been cleared by the labor department and are back on the job within days.

A key problem for general contractors is that they do not have a legal right to examine another business’ payroll records, he said. If they did, then he would agree that general contractors should be held responsible.

Resa Spaziani, a DOL supervisor who heads the stop-work order effort for the DOL’s division of wage and workplace standards, said she doubts the claims of many general contractors and developers who say that they are unaware of a subcontractor’s subterfuge.

“So many underbid substantially that there is no way someone could do that job legally,” she said.

While the general contractors are not directly involved in hiring day laborers or misclassifying workers, they become acutely aware of their subcontractors’ legal problems when the state stops work at their construction site for employee wage violations.

The workers are often exploited, said Gary Pechie, director of DOL’s division of wage and workplace standards. “Many of the employers are barely paying their workers. They are building major hotels, malls, $600,000 to $800,000 luxury homes off the backs of workers who are paid minimum wage,” Pechie said.

“It’s a culture of greed,” said Spaziani. “They think they are above the law. They don’t pay benefits, taxes, workers’ comp insurance. And they pocket all the additional money.”

She added, “Violations of undocumented workers are pervasive. It’s everywhere. I can’t do my job anymore without an interpreter.” Spaziani noted that 75 percent of the state’s stop-work orders pertain to undocumented workers.

Even documented laborers have been stung by employers. Juan Carlos, a native of Columbia who has worked in the United States for 15 years, was hired as an independent contractor by Cesar Morocho, owner of CGM Construction, a subcontractor of the North Haven company, Diversified Technologies Consultants, to work on the construction of the U.S. Coast Guard’s Command Center last year.

Carlos was paid in cash once every 15 days. But instead of earning $15 per hour as promised, he was paid $9 per hour, and, beat out of two weeks’ pay.

“Usually, the workers take what they are paid. People with no paper [working visa or green card], have no choice,” Carlos explained through interpreter Ted Duarte, of the New England Regional Carpenter’s Union.

But Carlos did something few day laborers do. He complained. As a result, state investigators issued CGM a stop-work order in March 2008 and required restitution of back wages of $57,289 to 10 workers. Diversified Technologies Consultants paid the back taxes and CGM paid a $2,700 fine.

Some subcontractors count on the state being unable to conduct a thorough investigation. Recently, the DOL discovered that an employer provided Social Security numbers for 35 male workers, all natives of Honduras. Although the Social Security numbers were legitimate, they were for 35 women of Vietnamese descent.

“There are contractors who are defrauding the workers, the government, and other businesses that play by the rules,” Pechie said.

“There are contractors who are losing their homes. Their kids are on HUSKY because they are outbid by contractors who use undocumented workers or [illegally] classify the workers as subcontractors,” Spaziani said. “It’s just not right. It’s bank robbery with a hammer.”

Spaziani recently began identifying the general contractor on the stop-work orders posted at construction sites.

But that isn’t helping contractors like Bob Fitch, president of New Haven Partitions. He said he continues to lose out to bids by general contractors whose sites are the subject of numerous stop-work orders.

Fitch says he is frustrated to lose work, especially in this economy. “We find ourselves struggling, while they are thriving,” he said.

New Haven Partitions employs an average of 150 sheetrock specialists and runs a union shop, paying workers about $37 per hour, which includes benefits and workers’ compensation insurance.

But Michael Kolakowski, president of KBE Building Corp. in Bloomfield, maintains stop-work orders are issued primarily because of missing paperwork. He said KBE is a target of a local labor union whose members have complained to the DOL. He said the union’s motive is to force KBE into using only unionized workers.

“We do everything we can to ensure that people are adhering to the law. The problem is, we can only go for so far. If someone wants to cheat, they’ll find a way to cheat,” he said.

Subcontractors working for KBE have been shut down 10 times over the past 22 months and its worksites have been the target of protests by the New England Regional Carpenter’s Union.

The union tensions are “festering up these kinds of issues,” Kolakowski said. “There is a whole other story here, and unionizing would not be in the best interests of our customers.”

Kolakowski said that the stop-work orders were lifted, in most cases, within a day. “When the piece of paper is produced, they lift the stop-work order,” he said.”

Spaziani said the idea that she would close down a site because of missing paperwork is “insulting.” She said she checks an online database that provides up-to-do-date information about the status of workers’ compensation insurance.

About 70 percent of the complaints come from competitors who are underbid by those who aren’t complying with the laws, she said.

Fitch is among the frustrated competitors and considers the government not performing enough due diligence. “[Government officials] see the opportunity to save a few thousand dollars by hiring a company that is border line, at best, with their records,” Fitch said.

He’s been called in at least twice to correct shoddy workmanship at government-project sites where unclassified workers were found to have been employed, including the Coast Guard project. The University of Connecticut also hired him to replace improper dormitory firewalls.

The state has issued 10 stop-work orders at federal construction sites.

“The government,” he said, “is not setting the example.”

Reader response:

"Great article. We need to shed more light on these practices. And shut these law breakers down, so that legitimate businesses will have more opportunities to employ tax paying workers.and get our economy back on it's feet.'' -- Mass Carpenter, NERCC

"This article really connects the dots between employee misclassification and the pain being felt by Connecticut taxpayers and law-abiding subcontractors. We hope it will help motivate the state to go after those uncollected tax dollars as part of its budget solution.

Unfortunately, KBE Building Corp. apparently looked at the same set of facts and could only see its own pain at being on the list. We had our first conversation with Konover/KBE on the misclassification issue in 1999, and they have had many opportunities in the past ten years to take it seriously. Only in the past four months have they implemented a badging program now that the role of the GCs is getting more attention. So far workers are telling us that it is as full of holes as swiss cheese. What is important is not just systems or programs but the will to change the way business is done.

KBE is the only ENR Top 400 contractor (a ranking based on annual sales volume) out of the seven companies listed in this article, and one of only two that perform work for the State of Connecticut. Using the shadow economy at that level of size does major damage to responsible subcontractors and corrodes our state's construction industry. We hope KBE will truly change its business model and start using its substantial influence to make things better instead of worse.'' -- Margaret Conable, New England Regional Council of Carpenters