Workers underpaid on KC housing project

Posted Friday, Sep. 05, 2014  comments  Print Reprints
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The Star reviewed more than 700 pages of federal documents required of contractors on the rehab projects to verify they had paid the correct prevailing wages.

Most workers on the project, such as roofers, carpenters and cement finishers, were listed as employees, with proper deductions for taxes and accurate contributions to fringe benefit funds.

But at least 11 employers usually carried the same kinds of workers as independent contractors. They paid those workers their gross earnings, with no deductions for taxes or other costs.

Such broad differences in the treatment of construction workers on the same project is often a red flag that misclassification has occurred, experts told The Star.

In addition, The Star found many of the workers listed as independent contractors did not have a city business license or a company on file with the secretary of state.

Michael Kelsay, a University of Missouri-Kansas City economics professor who also reviewed the records for The Star, added that many employers paid different types of workers the exact same income in a given week. “Given my experience in reviewing thousands of these records, that is often a tip-off that misclassification has occurred,” he said.

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When Uncle Sam doled out $4.5 million in stimulus money to fix up low-income housing in Kansas City, it should have been a win-win for everybody.

Residents would get new roofs and maybe a paint job, construction workers would get the relatively high wages required on federally funded projects, and the local economy would get a needed boost.

Many of those workers, however, appear to have been victimized by a common ruse.

Instead of listing roofers, carpenters and other workers on payroll records as employees — which many appeared to be — some companies on the project treated them as independent contractors.

As a result of that and other problems, some workers were underpaid by up to $20 an hour, according to federal records. That was money that employers could simply pocket, housing officials said.

In addition, some workers were exposed to uncompensated workplace injuries; some failed to get federally required fringe benefits; and some were denied time-and-a-half pay for overtime work.

The arrangement also allowed employers to avoid taxes and other employment costs.

Certified payroll records for the 2010 project –– required by the federal government and obtained by McClatchy newspapers under the Freedom of Information Act –– raise other troubling questions. For example, two workers shared the same apparently invalid Social Security number, and some shared numbers with numerous other people.

“These documents don’t even pass the smell test,” said Michael Kelsay, an economist and professor at the University of Missouri-Kansas City who reviewed the records for The Kansas City Star.

Kelsay said he saw red flags indicating misclassification in the documents he reviewed. If so, “the companies involved are skirting the law,” he said, adding that the problem is widespread and rife throughout the construction industry across the nation.

Kelsay, who has received funding from several union and management organizations to study the problem, found that Illinois, Indiana and Kentucky alone have lost tens of millions of dollars in unpaid taxes to their unemployment funds because of the practice.

“The misclassification of workers such as I saw on this (Kansas City) project results in a massive loss of taxes nationwide,” Kelsay said.

Misclassification, illegal under Missouri law, is a means employers use to underpay their workers.

Agencies that oversaw the Kansas City project, however, say it’s not their job to monitor how employers categorize their workers.

The Department of Housing and Urban Development (HUD), which authorized federal funds for the project, said that’s the job of the Housing Authority of Kansas City, the contract administrator for the project.

The Housing Authority acknowledged that some underpayment of workers occurred, but said monitoring for misclassification — often the basis for underpayment — isn’t its job either. It passed that responsibility on to the contractors the authority hired for the job, and the workers themselves.

But an expert at the U.S. Department of Labor said workers often are reluctant to complain for fear they will be fired.

The Labor Department expert, who spoke on the condition of not being named, said it would be “prudent” for contract administrators such as the Housing Authority to monitor the issue more closely.

Good intentions

Federal dollars for the 2010 rehab projects were provided under the Public Housing Capital Fund Recovery Act, which authorized up to $4 billion in grants to public housing authorities nationwide.

The grants were meant in part to preserve and create jobs and to push the recovery of an economy bogged down in recession.

The Housing Authority of Kansas City used its $4.5 million in grants to fund 56 projects –– mostly to rehabilitate public housing here –– and to pay administrative costs.

As with many other federally funded projects, the grants required private contractors to pay relatively high “prevailing wages,” as determined by the secretary of labor.

Those wages (often closer to union wages than nonunion wages) required, for example, that as of January 2010, carpenters be paid wages and fringe benefits totaling $37.09 an hour.

The HUD secretary at the time, Shaun Donovan, boasted in 2011 that for every million dollars of Recovery Act investment in public housing, such as Kansas City’s rehab project, 26 new jobs were created.

Indeed, the Housing Authority confirmed that the rehab project alone created more than 100 local well-paying jobs.

However, documents obtained by McClatchy newspapers for the Housing Authority project and hundreds of others across the country raise serious questions about the quality of some of those jobs.

Of the more than 25 companies that worked on the rehab project here, at least 11 appeared to have either underpaid or misclassified their workers, at least at some points in the project.

Interviews and payroll records indicate — and the Housing Authority has confirmed — that some workers were paid less than the prevailing wage required for the jobs.

As with a number of other companies, Kansas City-based Immaculate Enterprise LLC listed most or all of its workers as being independent contractors or having been given IRS Form 1099s, on which they were to report their earnings for tax purposes, as independent contractors would.

“This is my business and that is my option,” owner Jayne Njuguna said.

Payroll sheets the company filed with the Housing Authority indicated that Immaculate paid roofers the proper wage of $31.25 an hour, but the documents did not show that workers were paid $12.49 an hour in required benefits.

Another company, Midwest Construction Services, also listed its employees as independent contractors and underpaid them, according to payroll sheets.

A former painter for the company, Dale Whitten, was listed on certified payroll records as having earned $20 an hour. But prevailing wages required for the job were $41.75 an hour, which includes $12.90 in fringe benefits that are supposed to be paid directly to workers who are listed as independent contractors.

Whitten, of Holt, Mo., said he knew he should have been paid more but at the time he was “just happy to be making anything.” Even at that lower rate, he said, he and other workers for the company often had to wait five weeks or more to get paid.

Although Whitten used his own equipment for the work, he said he doubts he or his co-workers would meet the legal requirements as independent contractors because they were directly supervised by the company owner, who later had to approve their work.

Midwest’s owner, William Cole, has since died, and Housing Authority officials said they don’t think the company is still active.

According to payroll records, Smitty’s General Contracting also deducted no taxes from employee paychecks, in essence treating them as independent contractors. The company also listed some wages on its certified payroll sheet that were nearly $13 an hour below what should have been paid.

After The Star pointed out problems, Edwin Lowndes, executive director of the Housing Authority of Kansas City, acknowledged that Midwest and Smitty’s failed to pay all the wages employees on the job were owed.

He and his staff then attempted to follow up on the newspaper’s findings.

Lowndes said the owner of Immaculate claimed she simply erred in filling out wage reports and actually paid the correct wages. Lowndes confirmed that she filled out the forms incorrectly. But the company was unable to produce the canceled checks to prove payment because the company’s bank only keeps them for three years.

His staff was unable to get any answers from Smitty’s.

Unfortunately, he said, the company has been “completely unresponsive to our calls and letters,” and the Housing Authority hasn’t done any business with it since those issues arose.

After repeated attempts, The Star was able to reach Smitty’s owner LaCurtise Smith, who said he paid his workers well in excess of the wages and fringe benefit payments required by the government. If the paperwork did not reflect that, he said, it was because it’s a “nightmare” to fill out the federal forms.

“Filling out those forms, nobody knows how to do it,” he said.

Unless workers in those companies meet strict Internal Revenue Service guidelines, the practice of carrying them as independent contractors amounts to “misclassifying” them.

Although honest employers may unintentionally misclassify workers, others purposely do so to reduce labor costs and avoid taxes, according to state and federal enforcement officials.

Those officials say that in order to legally carry a worker as an independent contractor, the worker must work independently, the work must be performed “outside the usual course of business of the employer,” and the worker “must be customarily engaged in an independently established trade or occupation.”

Too common

Misclassification is an all-too-common practice in the construction industry, experts say.

State and federal officials estimate that 30 percent of companies nationwide illegally misclassify their employees as independent contractors.

Improperly classifying employees as independent contractors allows companies to avoid paying a portion of the worker’s Social Security taxes and state taxes toward a fund that finances unemployment benefits. It also allows employers to avoid buying workers’ compensation insurance to cover medical costs of workplace injuries.

In addition, the practice allows employers to cut down on paperwork. That’s because when workers are carried as independent contractors, employers pay them their gross wages with no deductions.

Although the IRS says it collects 99 percent of the withholding and payroll taxes owed by workers treated legally as employees, those classified as self-employed independent contractors underreport their income by 56 percent.

“Misclassification of employees as independent contractors is unacceptable,” Nancy Leppink said in 2012, when she was a top official with the U.S. Department of Labor’s Wage and Hour Division.

She made the statement after the Labor Department recovered nearly $800,000 for workers who were underpaid on several federally funded projects.

Leppink added that the maneuver is “something we see all too often in industries that employ vulnerable workers and in which we’ve historically found significant wage violations.”

Still, some contractors did it right in the Kansas City rehab project.

Large unionized firms submitted detailed payroll records to the Housing Authority showing tax and Social Security deductions for each cement mason and laborer, and the payment of fringe benefits.

It tended to be smaller, nonunion firms that carried the same kinds of workers as independent contractors, made no deductions and often underpaid them.

One spokesman for a nonunion contractors association said its members do comply with the law.

“We all recognize that workers are misclassified as independent contractors when they are actually employees,” said Steve Schuster, a private attorney who represents the local chapter of Associated Builders and Contractors.

“ABC promotes compliance and believes our members adhere to the law.”

When contractors treat some workers as employees and others as independent contractors, that’s “a real red flag” that workers are being illegally misclassified, said Marty Matthews of the Labor Management Fair Contracting Foundation in Kansas City.

In addition, Matthews, who did not name specific companies, said irregularities that The Star found in payroll records show “it’s a good bet” that at least some of the workers on the stimulus-funded project were undocumented.

For example, some workers shared Social Security numbers with other people, and some workers were listed as living at the same nonexistent local addresses.

One worker listed in the records has a name and Social Security number that appear to match that of a man living in Syracuse, N.Y., and who told The Star he’s never even been to Kansas City.

Missouri employers that knowingly cheat can face penalties from $50 to $1,000 per day in Missouri and up to six months in jail per violation.

Whose job?

But investigating the ongoing misclassification of workers is a problem because many government agencies don’t see it as their job. And even if they do, they are woefully shorthanded.

The regional office of the Department of Housing and Urban Development, which authorized federal funds for the rehab job, has only two employees to ensure the enforcement of prevailing wages on millions of dollars in federally funded projects in Kansas, Iowa, Nebraska and Missouri.

Even so, however, HUD recovered more than $1.3 million in underpayments to workers on those projects between October 2012 and September 2013 — probably a fraction of total underpayments, experts say.

In the case of the Housing Authority rehab project, it was the Housing Authority, as the contract administrator, that was supposed to review payroll documents.

But Lowndes said only a spot check was required by federal officials, which is the reason The Star found underpayments that the Housing Authority missed.

As for misclassifying workers, Lowndes acknowledged that it can be a problem, but added, “It is not our responsibility.”

He added that the companies his agency hires to perform construction work are allowed under federal law to hire workers who are indeed independent contractors.

“The contractors, as well as any subcontractors, are responsible for ensuring that they comply with any legal requirements relating to workers’ compensation, unemployment insurance and taxes,” Lowndes said.

As for other problems The Star found on payroll records, such as duplicate Social Security numbers and workers living at nonexistent addresses, Lowndes said HUD only requires that his agency “spot check” those documents.

“We generally do not review that information even if it is provided,” Lowndes said. “As for the same Social Security number being used for two different workers, if that was identified in one of the spot checks, we would have requested the contractor to correct the error.”

But he added, “Unless it appeared the contractor was intentionally falsifying the payroll records to underpay workers, the error would be considered minor.”

Joe Hudson, an official of the Carpenter’s Union here, said he’s heard it all before.

Oversight is so spotty, he said, that his union has tried to monitor prevailing wage jobs on its own to look for underpayments and improper worker classification. But when they find it — which is often — they are seldom successful in getting the government to investigate.

“There are many government agencies out there that are supposed to enforce this,” Hudson said, “but they are short-handed and they don’t talk to each other.”

They should pay better attention, he said, because studies show that for every $1 spent on enforcement, there is a $2 to $3 return.

Other projects

The Housing Authority of Kansas City rehab project represents only a tiny portion of the problem here and across the country, experts say.

Indeed, one union here is suing a local contractor in Jackson County Circuit Court alleging that the company, New Horizons, underpaid its workers on prevailing wage jobs and retaliated against them when they complained.

In a statement, Construction and General Laborers Local 264 said the class-action suit it filed late last year “is about a level playing field and fair pay for all construction workers.”

New Horizons responded that it paid workers according to the law. That case is pending. Meanwhile, Roofers Union Local 20 also has filed a prevailing wage complaint with the state against New Horizons, union business manager Kevin King said, and is awaiting a decision.

Unions often monitor federally funded projects to look for prevailing wage and misclassification violations.

In 2007 the Carpenter’s Union monitored a federally funded housing project at Richards-Gebaur.

The union said it found that several contractors routinely paid less than prevailing wage, misclassified their workers and hired undocumented workers to save money.

During its research, the union discovered that one worker was injured on the job when a piece of lumber fell on his foot.

A co-worker testified during a state labor department hearing on the matter that the man’s employer gave the injured worker $50 in cash and told him to go to the emergency room but not to tell doctors he was injured on the work site.

Those kinds of stories are all too common, union officials say.

“It’s a crisis in construction right now,” added Dave Wilson, a Carpenter’s Union representative.

“Contractors that play by the rules and take care of their people and pay a decent wage are under pressure to adopt these same illegal practices or watch their business opportunities evaporate.”

But things could be improving soon locally, at least at Kansas City’s City Hall if not the Housing Authority.

This summer, Kansas City began using a new computer software program that makes it easier for the city’s contract compliance office to compare the payrolls contractors submit with prevailing wage rates.

Besides reducing paperwork, the city says, contractors that had trouble filling out the old forms can go online.

Kevin Wells at the city’s Human Relations Department said the system also allows city staff to spend more time on job sites to ensure that contractors are classifying workers properly.

“It’s a great system to have,” he said.

The Kansas City Star’s Zahid Gishkori contributed to this report.

We want to know your thoughts and experiences with misclassification. Share your feedback directly with the reporter: Send email to mhendricks@kcstar.com or call 816-234-4738.

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