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Salisbury, NC, firm may have skirted plumbing rules

Posted Thursday, Sep. 04, 2014  comments  Print Reprints

The series

Sunday: A huge tax drain

Monday: Under government’s nose

Tuesday: Workers feel pinch

Today: Companies that cheat

Thursday: Getting it right

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A Salisbury, N.C., plumbing company that performed the most work on government-backed affordable housing projects in North Carolina during the recession used a practice regulators say can run afoul of federal labor laws and licensing requirements.

A yearlong examination by The News & Observer and The Charlotte Observer found Makson Inc. was one of many companies in North Carolina to treat most or all their workers as contractors rather than employees. Nearly 45 percent of the 826 companies that took part in the federally funded projects in the state evaluated by the newspapers appear to have misclassified at least some of their workers.

Over the past several years, Makson has become a powerhouse in the plumbing business, expanding its reach throughout the Southeast and expanding into electrical and fire safety work. But payroll records show the subcontractor may have also violated rules that require plumbers to either be licensed or be employees of a licensed contractor.

Makson’s use of independent contractors helps the company shave labor costs, giving it a competitive advantage when bidding for work. Companies that treat workers as employees absorb at least 20 percent in labor costs with payroll taxes, unemployment taxes and workers’ compensation insurance.

In North Carolina, regulators give extra scrutiny to companies engaged in specialized trades such as plumbing and HVAC. The level of skill required and the dangers of a mistake mean that the work must be supervised closely.

State licensing rules for plumbing, HVAC, electrical and fire safety companies specifically prohibit companies from hiring unlicensed subcontractors. Anyone without a license must be an employee under the careful watch – and on the payroll – of someone who is licensed.

Makson wasn’t the only company in these trades to treat workers as independent contractors. And the newspapers’ investigation shows that no one – not the examiners who run the state’s licensing board, the general contractors who hired these subcontractors, or the local and federal regulators who collected payroll forms – stopped them.

Government regulators and general contractors also missed other red flags on the companies hired to do government work, including tax liens.

Payroll forms for five North Carolina projects involving Makson showed the plumbing subcontractor withholding taxes for its superintendents, but not other workers listed as “plumbers.” These plumbers don’t carry their own licenses, state licensing board records show.

“If they’re doing work that requires a license, then it suggests that there is a violation,” said Dale Dawson, executive director of North Carolina’s State Board of Examiners of Plumbing, Heating and Fire Sprinkler Contractors. Dawson said the state board plans to investigate the company’s practices.

The newspapers also asked a former Labor Department official who is now a private consultant in Louisiana, Don Strobel, to examine the payroll forms.

To be considered independent contractors, the workers would need to meet criteria such as having a substantial investment in their own equipment and competing for jobs themselves, Strobel said, which he deemed unlikely. Independent contractors typically aren’t paid by the hour, he added. That’s because there is no opportunity for profits or losses on the job.

“It is my opinion,” Strobel said, “that they would not meet the tests to be considered independent contractors.”

The role of ‘plumbers’

David Eller, Makson’s president, defended the company’s practices, saying it properly classified its workers. Makson also meets plumbing board rules because the workers that didn’t have taxes withheld were doing nonplumbing work such as digging ditches, he said.

“I do not use these guys to assemble, design and install the plumbing systems,” Eller said. “I use them for labor.”

On the forms, however, Eller lists the jobs of the independent contractors as “plumbers.” He said that’s just a work classification required by the forms.

By listing workers on the payroll forms, Makson was certifying that the company paid them each week. But Eller insisted that many of the workers were not his employees but instead came from labor-staffing companies.

“We use labor-provider companies to help supplement the work whenever we have the highs and lows of the economy because we can’t carry that many people on a payroll,” he said.

In the projects reviewed by the newspapers, several companies did turn to staffing firms to help them augment their workforce. In those instances, though, the staffing firms submitted payroll records listing the workers as employees with taxes withheld. In contrast, Makson supplied no separate payroll records for a staffing firm. Instead, it listed the workers on its own payroll.

When shown some of Makson’s payroll documents, Dawson, who has been with the board more than 20 years, questioned Eller’s explanations.

“In the papers we saw, we see two supervisors listed as employees and everybody else is listed as subs,” he said. “The two supervisors are doing all the work? There’s not that much labor that doesn’t require a license.”

Tax liens on projects

General contractors hired to build publicly funded affordable housing projects sign a contract agreeing to follow all federal and state laws and to make sure the subcontractors they hire do as well.

Officials at the local housing authorities and municipalities that oversee the contracts for the projects say they don’t vet each subcontractor. They said they trust that the general contractor hires companies in good standing.

The review, however, found general contractors engaged with firms that appeared to have misclassified their workers and had other problems, such as unpaid taxes.

Among them:

• Villagomez Construction Inc. of Greensboro installed plumbing at a project in Raleigh in 2013. None of the three plumbers listed on payrolls, including the owner, has a license to do plumbing work in North Carolina, according to a licensing database. The company could not be reached for comment.

• G.R. Hammonds Roofing Inc. of Lumberton had a federal tax lien when it began roofing an affordable housing complex in High Point in October 2010; the company settled the lien a month later. Company owner Anita Blank said the roofers the company hired for $12 an hour were “basically their own boss” and that the work “is not anything that really requires supervision.”

• Ricky’s Superior Concrete LLC of Myrtle Beach didn’t carry workers’ compensation on its crew of masons for the first several months the company poured concrete at an affordable project in Knightdale, according to a South Carolina database of workers’ compensation coverage.

Companies with three or more employees must carry workers’ compensation insurance in North Carolina; the company listed more than six workers on its payroll reports. The company could not be reached for comment.

•  The N.C. Division of Employment Security placed a lien against Shannon Daniels Flooring of Albertson for failing to pay $487 in unemployment taxes in January 2012. Six months later, the company began laying floors at an affordable housing development in Jacksonville.

The company listed the workers as “pays own taxes.” That would indicate the owner didn’t pay unemployment taxes on these workers. The company could not be reached for comment. The taxes owed under the lien haven’t been paid, court records indicate .

• TRACO Gypsum Flooring of Oak Ridge had liens filed against it for not paying $64,119 in federal taxes while doing drywall work on an affordable housing project in Concord in 2010. The liens stemmed from quarterly tax forms that must be filed by employers who withhold income taxes, according to court documents.

“We always want to do everything right and pay everything on time,” company President Tracy Cooke said of the liens, which were lifted after the company paid the taxes. “But sometimes that’s just not possible in the real world for any corporation. You make it right as quickly as you can.”

On payroll forms for the Concord project, TRACO said its workers paid their own taxes. Cooke said the lien did not stem from misclassification.

It’s not unusual for contractors with tax liens to land government work. A 2011 U.S. Government Accountability Office report found that at least $24 billion in stimulus funds went to 3,700 companies owing hundreds of millions of dollars in federal taxes. The report said federal law does not prohibit a contractor with unpaid federal taxes from receiving federal contracts.

The N.C. Housing Finance Agency, which provided funding for affordable housing projects across the state during the recession, said misclassification and other problems, such as tax liens, weren’t something the agency was looking for when it was doling out stimulus money. The agency will soon begin educating developers and contractors about these issues, said Bob Kucab, the agency’s executive director.

A Raleigh-based housing nonprofit called DHIC developed one of the affordable housing projects where Makson was a plumbing subcontractor. DHIC’s president, Gregg Warren, said he wasn’t aware of issues with the misclassification of workers until a 2012 series published by The News & Observer.

After the series, DHIC sent a notice to all of its general contractors saying the nonprofit expected they would do their best to make sure their workers were properly classified. “It’s our expectation,” Warren said, “that all of our dealings are with companies that follow the laws of the land.”

General contractors who have used Makson on affordable housing projects said they leave it to the plumbing subcontractor to properly classify its workers.

Weaver Cooke Construction President Dan Estes said he has an obligation to check subcontractor payroll forms to make sure they’re accurate, but it’s not the company’s role to go into the field and see whether workers are classified as independent contractors. “It’s not on our radar,” he said.

WB Properties & Construction of North Carolina ensures subcontractors are properly licensed and requires that a superintendent stay on the job. But it’s up to Makson to make sure its workers are properly licensed, President Brian Smith said.

Allegations against Makson

Makson’s payroll forms, however, raise questions about whether the company follows North Carolina regulations for plumbers.

Under the North Carolina Administrative Code, workers do not have to have plumbing licenses themselves if they are “directly and regularly” employed by a licensed contractor. Factors that show a worker is an employee include whether taxes are withheld and whether the licensed contractor exercises control over the employee.

Dawson of the plumbing board said the board imposed the rule in the late 1990s because forcing workers to be licensed or on the payroll put all companies under the same standards and raised quality, he said.

Two years ago, the board also heard criticism from contractors alleging that a half-dozen companies, including Makson, weren’t following the rules.

“All field installers are to be employees of the licensed company receiving W-2s, not unlicensed subcontractors or laborers receiving 1099s,” the letter stated. “Most of the companies listed below are using unlicensed subcontractors receiving 1099s in violation of State Board of Examiners laws and rules.”

The contractors asked the board to investigate, saying if the practices continued it would put “tax paying, licensed legal companies, who employ North Carolina citizens, out of business,” according to the letter.

The investigation resulting from the letter, Dawson said, led to one license suspension and one license probation, but he was unable to provide any documentation on the cases.

Dawson said the 2012 allegations against Makson could not be proven. The board, he said, doesn’t have the authority to audit companies and investigate their books, which hamstrings investigators’ ability to see and stop misclassification.

Now that Makson payroll records have become public, Dawson said he plans to investigate the company’s practices again.

Eller founded Makson in 2004 after previous jobs in construction, according to the company’s website and his LinkedIn account. The company’s territory now spans from Maryland to Texas.

Through a public records request, newspapers examined payroll records for five multifamily projects that Makson worked on in Concord, Hudson, Raleigh, Shelby and Winston-Salem. The work took place from 2010 to 2012.

In the five projects, Makson withheld taxes for superintendents, according to the payroll documents. But for workers described as plumbers or laborers, the forms mostly say, “Employees pay own taxes” or “subs pay own taxes.”

Eller said it’s up to the labor firms that employ the workers to issue 1099s or withhold taxes, he said. Eller declined to disclose the names of the labor providers.

Laborers on the projects were supervised by licensed plumbers, Eller added.

“We do enough work that we keep our nose clean,” he said. “We really do.”

Makson now requires labor firms that it works with to submit their own payroll forms on government projects, said Jessica Milligan, a payroll analyst at the company. Makson declined to provide copies of recent forms it has submitted.

Dawson said labor-staffing companies could also be violating board rules if they have unlicensed workers who aren’t considered employees, he said. “To make this whole thing valid either (Makson) or the labor provider has to withhold the taxes,” he said.

‘Never my own boss’

In 2010, Tomas Salinas of Charlotte worked for Makson on affordable housing projects in Raleigh, Shelby and Concord, payroll forms show.

The company listed Salinas as a plumber, a plumber/pipefitter, a laborer and in one case left his job classification blank. The forms say he either paid his own taxes or left the withholding blank.

In an interview, Salinas said he did plumbing work for the company. He said the company sometimes referred to him as a “contratista,” or contractor, but that he thought he was an employee. He doesn’t hold a plumbing license, according to a board database.

“I was never my own boss,” he said. “They told me when to arrive.”

The Ecuadorean immigrant described Makson as a good place to work. He said his bosses paid on time and that they never missed a check.

Franco Ordoñez in the McClatchy Washington Bureau and Charlotte Observer researcher Maria David contributed.

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 rrothacker@charlotteobserver.com or 704 358 5170; or on Twitter @mandylockenews or @rickrothacker.

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