In the months that a $10 million housing project rose from a north Columbia hillside, teams of workers installed pipes, laid carpet, lifted boxes, swung hammers and cemented bricks as their employers raced to meet deadlines.
But about a third of the construction companies hired to build the Village at River’s Edge failed to withhold Social Security, Medicare or income taxes on workers they employed, Columbia Housing Authority records show.
The construction companies considered the workers to be independent contractors. It’s a classification that saves businesses money on taxes and insurance — but one that is under increasing scrutiny for the impact it can have on working people, on taxpayers and on other businesses that compete for government contracts.
A McClatchy Newspapers investigation has found thousands of examples nationally of companies classifying workers as independent contractors when evidence suggests the workers were really company employees.
That has left workers liable for costs that businesses otherwise would have paid. Billions of potential tax dollars have been lost across the country, the newspaper investigation found.
Using independent contractors also has lowered costs enough for some businesses to get an unfair advantage over competitors seeking to bid on projects, such as government construction jobs.
Evidence of the practice shows up across South Carolina, a poor state with limited protections for workers.
At least 338 companies have misclassified 2,189 workers during the past two years, prompting financial sanctions against the businesses, according to the S.C. Department of Employment and Workforce. That is about 12 percent of all the companies audited since 2013, workforce agency records show.
Those companies failed to pay unemployment taxes that help workers who are laid off or dismissed, agency spokeswoman Adrienne Fairwell said. The agency has found similar misclassification trends in the past, she said.
“It is a matter of fairness,’’ she said, explaining why it is important for businesses to accurately classify the people who work for them. “We’re on the lookout for this, and we’re trying to educate employers about how workers should be classified correctly the first time around.’’
In Columbia and Charleston, questions about misclassification have arisen on projects that were paid for with federal stimulus money and overseen by some of the state’s larger public housing authorities.
From 24 to 38 percent of the construction companies hired for selected projects in Charleston and Columbia considered their workers to be independent contractors, rather than employees entitled to benefits, according to records reviewed by The State newspaper. State and local housing authorities in those cities received nearly $30 million in federal stimulus money for more than a half-dozen projects reviewed.
Overall, at housing authorities in Columbia and Charleston, The State newspaper found at least 69 of 215 companies failed to withhold Social Security, Medicare or taxes for workers they employed from 2009 to 2012, records show.
The highest percentage of companies calling workers independent contractors was at the River's Edge project, the controversial north Columbia development along the Broad River. Efforts to get comments from SK Builders, the project’s general contractor, were unsuccessful.
State workforce department spokeswoman Fairwell declined to say whether her agency had looked at housing authority contractors in Columbia and Charleston.
Sometimes, businesses that misclassify workers don’t understand the law, which they say is complicated to follow. But sometimes they do, their workers charge.
Two recent lawsuits in South Carolina, one involving a nurse and another involving topless nightclub dancers, accuse employers of declaring workers to be independent contractors, instead of properly classifying them as employees. The nurse’s case was resolved last year when the S.C. Supreme Court ruled she was an employee – a decision that allows her to collect workers’ compensation benefits.
Federal and state agencies acknowledge that they miss cases of misclassified workers. But when companies are caught misclassifying workers as independent contractors, “they have to pay back all of the federal taxes, and at the same time, any penalties and interest,’’ Internal Revenue Service spokesman Mark Green said. “You could be paying triple the amount of what you would have paid if you had just treated the individual like he or she should have been treated.’’
The state Department of Employment and Workforce has issued financial penalties against companies found recently to be misclassifying workers, but the agency declined to release the amount of the penalties.
The department also declined to release details of the audits of the 338 companies that had misclassified workers. The agency said it can’t release the information because a federal law treats unemployment compensation information as confidential, department lawyer Derrick McFarland said.
Businesses and taxpayers
Matt Capece, a Connecticut lawyer who has represented national and international carpenters unions, said the practice of companies declaring workers to be independent contractors is popular because of the potential savings.
Businesses that take out taxes, provide insurance and give benefits can pay 25 to 30 percent more to cover employees than companies that declare workers to be independent contractors, Capece said.
For example, companies using independent contractors in Minnesota paid 26 percent less per hour for drywall installers than if the workers had been employees, according to a 2013 study by Columbia University.
“Workers are being hurt more than anybody, but it also would be law-abiding employers,’’ Capece said. “The overall thought is that this is a plague. It is rather astounding to me.’’
Workers whose employers don’t withhold Social Security, Medicare and unemployment taxes are left to pay the full amount owed, instead of sharing those costs with the companies they work for. By law, companies must match Social Security and Medicare payments by employees.
Leaving it up to contract workers to pay taxes, rather than businesses withholding the money from paychecks, also can be costly. Many workers don’t pay the taxes that their employers would have withheld and paid to the government.
McClatchy’s investigation, which relied on thousands of payroll records, has documented an estimated $2 billion in tax losses from the construction industry annually in North Carolina, Texas and Florida. North Carolina alone has lost an estimated $467 million annually, McClatchy found.
McClatchy’s findings reflect what Congress heard last year when the National Employment Law project testified about misclassification. Potentially billions of dollars could be lost nationally in revenues owed to the government, according to studies cited by the law project’s Catherine Ruckelshaus last November.
“Federal and state governments suffer hefty loss of revenues due to independent contractor misclassification, in the form of unpaid and uncollectible income taxes, payroll taxes and unemployment insurance and worker’s compensation premiums,’’ the group’s report to Congress said.
In South Carolina, however, the Department of Revenue does not think the state loses much money because employees are misclassified. The agency is confident the state catches those cheating on their taxes, said Meredith Cleland, a deputy at the agency. Cleland said the impact of employee misclassification is more likely to be a concern with unpaid unemployment or workers compensation coverage.
Fairwell, the state workforce agency’s spokeswoman, said her department has used part of a $1.8 million federal grant to help address concerns about employee misclassification. The agency has found that some companies have misclassified only a handful of their larger workforces, she said.
Hiring an independent contractor is legal, but companies that hire them aren’t supposed to control them, which includes giving daily working orders and detailed work instructions.
Independent contractors should set their own hours, use their own equipment and work at their own pace. An independent contractor, for instance, may work for one business, juggling that work with other contract jobs for other companies.
Questions arise about the validity of independent contractors when companies rely on these workers for eight hours of labor every day, for months at a time.
Records reviewed by The State newspaper turned up multiple examples of independent contractors being on the job almost every day for months of work in some public housing projects:
• One company hired to do framing work at the Columbia Housing Authority’s River’s Edge project had five workers on the job for at least 21 of 25 weeks. No taxes, Social Security or Medicare withholdings were deducted from their paychecks, Columbia Housing Authority records show. One of those people worked 24 of 25 weeks, records show.
• On the Columbia authority’s Latimer Manor housing rehabilitation project, another company did not withhold taxes, Social Security or Medicare for four workers who were on the job for at least half of the 41 weeks of work, records show. One man was on the job 31 of the 41 weeks. The job involved the use of mechanics and laborers.
• At the Housing Authority of the city of Charleston, a roofing company did not withhold Social Security, Medicare or taxes for any workers it hired and listed on payroll sheets in 2009. Payroll records show that some 40 workers were involved in the authority’s Meeting Street Manor project.
At both River’s Edge and Latimer Manor, which were paid for with $15 million in federal stimulus money, about 38 percent of the companies failed to take out taxes for those working for them, records show. The percentage was 27 percent at the Housing Authority of Charleston and 24 percent at the state Housing Authority, The State newspaper found in analyzing agency files.
For three years, the River’s Edge project was at the center of a federal criminal investigation into whether a private developer skimmed government money meant for project construction and converted it to his private use. In July, after a three-week trial, a federal jury found former River's Edge developer Jonathan Pinson guilty on public corruption charges.
However, there is no indication the criminal case extended to misclassified workers. Housing Authority capital improvements director Jethro Currie, who testified in the trial, said “the issue was never raised’’ in his dealings with federal authorities.
But Currie said he is not surprised that some companies working at the River’s Edge housing project said they were using independent contractors, rather than employees, to do the job. That is a common occurrence, particularly with large jobs that rely on a variety of subcontractors, he said.
Whether companies involved in River’s Edge misclassified workers is not something the Housing Authority keeps track of or was told by federal agencies to watch for, Currie said.
“We are not charged with the responsibility of trying to make the distinction between a ... contractor versus an employee of a company,’’ he said, adding rules on how to identify classes of workers are sometimes “murky.’’ “In construction it can be real difficult to do.’’
SK Builders, the prime contractor at River’s Edge, would say nothing about the issue of misclassified workers. John Lodato, an official with SK’s Vaile Construction division who was involved in the project, referred questions to a company vice president. Attempts this summer to reach that executive were unsuccessful.
Currie said that regardless of whether a worker is an independent contractor or a company employee, those bidding on Columbia Housing Authority work must guarantee they have provided workers’ compensation coverage. However, that requirement does not extend to unemployment insurance, he said.
Melissa Maddox Evans, chief legal counsel at the Housing Authority of the city of Charleston, said federal audits have not flagged her agency about any concerns with independent contractors. Whether companies withhold or match taxes for workers “would be a matter that the contractor would be responsible for,’’ she said.
Companies defend practice
Several of the 28 companies that used independent contractors at River’s Edge drew the attention of Columbia Housing Authority officials as the project progressed, according to agency files.
One was Acosta Construction of Charlotte. The State newspaper found Acosta did not withhold taxes or make Medicare and Social Security payments for 16 workers from March 2011 through early September of that year.
Records reviewed by the newspaper show at least five Acosta workers were employed virtually every week during the 25 weeks the company worked at River’s Edge. A key test of whether a person is an independent contractor is an employer’s control over that worker, including telling the person when to be at work every day.
Juan Luis Acosta Ruiz, the company’s president, said he hires people on a per-job basis and does not have any permanent employees. He said he didn’t withhold taxes or Social Security for workers.
“I don’t take nothing,’’ he said. “I pay to them .... everything.’’
Todd Ponder, president of Greer Flooring Center in the Upstate, said his company depends on independent contractors to help install carpeting and conduct other work.
“I would say 90 percent of the actual installers in the flooring industry ... are independent contractors, at least in the Southeast,’’ Ponder said. “As independent contractors, they set their prices and tell us what they’ll charge. It equates to making better wages than if they were on our payroll. It gives them a little more freedom as far as when they work and when they don’t. We don’t control their schedules.’’
Ponder said he thinks the government would prefer that companies not use contractors.
“The government feels like a lot of independent contractors don’t pay their taxes, is the gist I get on it,’’ Ponder said. “If they were payroll employees, we would be required to withhold taxes.’’