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For Florida companies that play by rules, success is tough as nails

Posted Thursday, Sep. 04, 2014  comments  Print Reprints
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Sandie Domando plays by the rules. And that’s why Concrete Plus, the Palm Beach Gardens construction company where she’s an executive vice president, has little interest in bidding for government work.

“We bid it to win,” Domando said. “And we know we don’t have a chance on most of those government jobs.”

But during the recession, when the shock waves of the financial crisis nearly toppled America’s construction industry, government work was the only option on the table. Private work had dried up. Concrete Plus went after contracts for 20 jobs with state or federal funding, mainly projects to build or improve low-income housing. It won just seven, well below the company’s usual rate of success.

And Domando says she knows why: “We were getting underbid by companies that were cheating.”

A yearlong investigation by the Miami Herald and McClatchy Newspapers seemed to confirm Domando’s suspicions. The investigation, which looked at the misclassification of workers in Florida and 27 other states, found that unethical contractors were able to work on stimulus-funded building projects even as they ignored labor laws and avoided paying state and federal taxes.

The construction industry alone accounts for billions of dollars in lost tax revenue nationwide.

The scheme is simple: Instead of treating workers as regular employees, companies classify them as independent contractors. That way, the companies don’t have to withhold income taxes from their workers’ wages or file unemployment taxes. Their labor costs are significantly lower than companies like Domando’s that obey the law. And their workers have to pay their own taxes at a higher rate than if they were employees, although many self-employed workers ultimately pay just a fraction of the taxes they owe, according to the Internal Revenue Service.

“There’s always going to be a scheme to avoid your taxes or any other cost of doing business the right way,” said Doug Buck, director of governmental affairs for the Florida Home Builders Association. “It is a formidable cost to be a legitimate contractor complying with all the rules.” When companies are allowed to cheat, Buck said, law-abiding competitors don’t get the business they deserve.

The Herald reviewed thousands of pages of payroll records for 29 major government-backed projects built in Florida from 2009 through 2013. Seven other McClatchy newspapers, the McClatchy Washington bureau and ProPublica, a nonprofit investigative newsroom based in New York City, reviewed about 170 projects from 27 other states. In Florida, the Herald’s analysis showed that one in five companies wrongly treated their workers as independent contractors.

Concrete Plus wasn’t among them.

In fact, the company paid taxes on more employees than any other contractor on the projects reviewed by the Herald — 218 workers in total on three jobs. Domando said she and company owner Michael Gillette have no interest in pushing tax obligations onto their workers. “Our employees depend on us,” she said. “There are families out there that depend on us.” The intentional misclassification of a worker is a felony under Florida law.

No single test can determine whether someone is an independent contractor or an employee. But independent contractors are usually skilled workers who run their own businesses and work for a number of different companies. They are often called “1099” workers, after the tax form they receive from employers.

The Roosevelt C. Sands Jr. Housing Complex, a low-income housing project in Key West, had more 1099 workers than any other project examined by the Herald.

“1099 workers are especially common among highly skilled and licensed mechanics such as plumbers and electricians,” said J. Manuel Castillo, director of the Housing Authority of Key West, explaining why his agency allowed employers to classify 154 workers as contractors on the project.

But the Herald’s analysis showed that companies on the Roosevelt Sands job were actually treating workers with less training and education as contractors, not highly skilled workers. That was true on all the projects examined by the Herald. Employers treated 31 percent of workers in trades requiring less training and education — such as carpentry, drywalling and painting — as contractors. In contrast, just 2 percent of electricians, plumbers and heavy equipment operators were listed as being independent.

“We have no 1099 employees at all. Not a single one,” said Domando. “No guy swinging a hammer on these construction sites should be a 1099.” Domando’s crew had a variety of workers, according to the payroll records, including carpenters, masons, laborers, metal workers and heavy equipment operators.

The recession was a frustrating experience for Domando. The company couldn’t hit the low numbers that general contractors wanted on their bids and, as a result, fired workers. From a pre-recession peak of 250 employees, Domando estimated that the company withered to a payroll of 150 when work was at its scarcest.

“And the projects we did get, those were just to keep people employed,” Domando said. “The margins were really, really thin on those jobs. Razor thin.”

“We were doing it to keep people in their jobs,” Domando added. She said the company broke even and sometimes lost money on government work.

With the economy in recovery mode, Domando said Concrete Plus’ portfolio is once again almost all private work.

That’s good news for the company but bad news for workers’ wages.

On government jobs, wages are fixed according to the Davis-Bacon Act, a 1930s-era law that provides fair pay for workers. Since wages are a set cost on Davis-Bacon projects — the same for every company — the savings from pushing taxes onto workers can be the difference between winning and losing a contract. That’s not as true on private jobs, where the market sets wages — significantly lower than the government-imposed rate — and there’s more work to go around. A metal worker on a Davis-Bacon job might make $33 an hour, according to Domando, and only $18 or $19 for private work. “It’s hard for them to go back to that after doing a government job,” she said.

But even in the private sector, misclassification presents a problem, Domando said. The pressure for low bids means law-abiding companies must cut wages to compete with their rule-breaking competitors. When cheaters are allowed to prosper, workers get lower pay.

Workers in many major construction trades have had to live with flat or declining pay over the past four decades, according to national data collected by the University of Minnesota. Some construction workers, including many Floridians, have seen a dramatic drop in wages tied to the erosion of America’s middle class. In 1970, the average carpenter in Florida made nearly $32,000 in today’s dollars. In 2012, the last year for which data is available, carpenters made just $14,400 on average. Florida roofers saw their average wages fall from $28,400 to $20,800 between 1970 and 2012. Drywallers have lost more than $20,000 from their average yearly paycheck in Florida. They now make just $14,100 per year.

“With those government jobs, it’s just not a fair playing field,” Domando said. “And that means that the tax money that we’re paying in — that everybody’s paying in — the government isn’t spending it on the people that need it.”

Domando said authorities at the local level didn’t even seem aware of the independent contractor problem. Neither did their federal supervisors at the Department of Housing and Urban Development. To do government work, every company must attend a series of classes held by the developer and local officials on how to comply with federal labor regulations. Representatives of HUD attend, too.

“1099 did not come up once in those meetings,” Domando said.

Evan Benn of the Miami Herald and David Raynor of The News & Observer in Raleigh, N.C., contributed to this article. Locke reports for The News & Observer. Nehamas reports for the Miami Herald. We want to know your thoughts and experiences with misclassification. Share your feedback directly with the reporters: mlocke@newsobserver.com or 919-829-8927; or fordonez@mcclatchydc.com or 202-383-0010; or nnehamas@miamiherald.com or 305-376-4960; or on Twitter @mandylockenews, @francoordonez, @NickNehamas.

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