Special Reports

September 4, 2014

Tax cheats are widespread in Texas construction industry

Texas taxpayers are losing $1.2 billion a year in a contracting scheme used by contractors who mislabel workers as independent contractors rather than hourly employees, in order to avoid paying taxes on them.

When word got out that the city housing authority was building a $32 million low-income housing complex, local building contractors lined up to get a piece of the action.

The project was so large that the contractors needed help from outside. The owner of Ruffin Enterprises Inc., got his from Daryl Wilkins, of Little Rock, Ark., who hauled workers in a van to Dallas and put them to work on Buckeye Trail Commons in the Bonton area of Dallas.

The way Ruffin explained it on payroll forms filed with the Dallas Housing Authority, each of the 61 hourly workers was his own boss, free to come and go as he pleased. The company withheld no taxes from the workers’ paychecks, treating them as independent contractors, not employees.

Classifying the workers that way allowed the company to avoid providing them with the benefits and protections required on federal projects. That also let them avoid unemployment, payroll and Social Security taxes. And, in many instances, workers’ compensation protections weren’t provided.

The bottom line: Companies that fudged on classifications have been able to shave off up to 20 percent from their bid, giving them an edge over competitors who play by the rules.

All told, in Texas, the practice is costing taxpayers more than $1.2 billion a year in lost federal income, payroll and unemployment tax revenues, the Star-Telegram found.

“That’s money out of my pocket and your pocket not getting where it should,” said Bill Belt, former head of investigations for the U.S. Department of Labor Wage and Hour Division for Texas and the Southwest.

A Star-Telegram investigation found that Ruffin Enterprises was among more than 150 Texas construction companies that treated hundreds of carpenters, laborers and other mechanical workers as independent contractors. The investigation was based on thousands of records for federally funded or backed projects from 2009 to 2013.

Experts, including former and current labor investigators, IRS auditors and labor attorneys, said that the companies were likely violating federal labor and tax laws by not counting the workers as employees.

The Star-Telegram’s examination was part of a national investigation by McClatchy Newspapers that found billions of dollars a year in lost tax revenue from the contracting scheme, known as misclassification. In Texas, the numbers are bigger than in other states where tax-loss estimates were available.

Tax cheaters operate with impunity under the nose of local, state and federal housing authorities in Texas. Agencies that are supposed to protect the workers and taxpayers say they aren’t aware of the problem or don’t have enough investigators to provide oversight .

No single factor determines whether a worker must be treated as an employee. But classifying workers arbitrarily as independent contractors isn’t a choice companies are allowed to make. Laws dictate whether a worker is an employee.

Belt and other experts interviewed by McClatchy Newspapers say that the workers listed on the payroll forms collected by the newspapers shouldn't have been treated as independent contractors.

Belt says it’s absurd to treat hourly laborers, such as carpenters, drywallers, painters and other mechanics as independent contractors.

“If he’s got hammers and nails and a truck and ladders and other equipment, a shop and an office, he might be an independent contractor,’’ said Belt, who engaged in hundreds of investigations of construction companies violating labor laws and the tax code.

“But if all he’s got is a hammer in his hand, he’s probably an employee.”

Contractors contacted by the Star-Telegram said they did not know much about the labor laws that govern federal projects. Ruffin Enterprises of Dallas said the 61 carpenter framers who appeared on certified payrolls were independent contractors, not employees, so they did not deduct taxes from their gross pay.

“We just 1099 ’em,’’ the office manager said, referring to the IRS form used to report payments to independent contractors.

She referred questions to attorney Dale Henley, who did not respond to calls and emails requesting comment on the payrolls.

Stimulus funds

The Star-Telegram examined payrolls for more than 40 projects such as schools, courthouse chillers and roadways that were funded by federal appropriations, community block grants and with portions of Texas’ $27 billion in federal stimulus money. None or very little abuse was found among businesses that specialize in state and municipal road and highway construction.

However, the examination found widespread use of independent contractors by construction companies working on 30 mostly low-income housing projects of more than $1 million each.

Of all 30 public projects reviewed by the Star-Telegram in excess of $1 million, the Dallas Housing Authority and the city of Irving had those with the highest percentage of workers treated as independent contractors.

Only four of about 17 contractors withheld taxes from gross wages for workers on a $3 million Tudor Lane townhome project in Irving partly funded with federal money. The majority of laborers were treated as independent contractors, their wages paid in gross amounts without tax deductions, records show.

In Dallas, the city’s housing authority depended mostly on independent contractors to install dumpsters, do structural repairs, fix roofs and paint exterior walls on housing for the poor. They worked on more than $6 million in projects at scattered sites, also doing asbestos clean-up, installing air conditioning units and working on underground electrical distribution systems, payrolls showed. Of roughly 122 laborers on the jobs, 85 were treated as contractors, not employees.

The Buckeye Trail Commons was built at the site that once housed the Turner Housing project in an area of Dallas notorious for criminal activity. The project was built by hundreds of independent contractors, records showed. Almost two dozen contractors of almost 40 didn’t consider hundreds of hourly employees — carpenters, dry wall workers, masons, framers, painters — to be employees, the payrolls indicated.

Many of the workers were building housing for the poor that offered greater comforts than the ramshackle, bug-infested homes they themselves called home.

In payrolls, the Star-Telegram found the names of seven workers who labored on a $15.7 million, craftsman-style affordable housing development near Interstate 20 in Fort Worth.

Workers compensation

By day, the workers labored at the glossy housing development with manicured gardens, circular pathways and a pool.

But as night fell, they returned to the address of a dilapidated house on a narrow street in Oak Cliff, a historically poor Hispanic suburb of Dallas, records showed. The roof of the home was crumbling and trash littered the lawn, while faded children’s art and some beat-up appliances sat on the front porch.

They and hundreds of other workers also labored without the proper work protections owed to them, paving streets, parking lots and building ramps for the elderly and the infirm.

Several workers, including carpenter Carlos Villegas, who lives in south Dallas with his two young daughters, said he paid for his own emergency room care when he was hurt on the job.

That’s because by being counted as independent contractors rather than employees, they aren’t covered by workers’ compensation insurance if the company has it.

This year, Villegas slashed his hand on the job. Had it been a worse injury, he might not have been able to get treatment.

Luis Estrada is a superintendent at a rebar company in Mesquite that has workers’ compensation insurance and deducts Social Security and other taxes from gross pay.

He wouldn’t work for a tax cheater, Estrada said.

“Let’s just say that if I fall to my death at work, I don’t want my family going broke just to pay for my funeral,’’ said Estrada, who has been employed by Linden Steel for 13 years.

Contract competition

Violations of labor and tax laws have become widespread for two main reasons — violators win more contracts and enforcement has fallen off.

Contractors who follow the rules figure in the costs of payroll, Social Security and unemployment taxes when they bid.

But by treating workers as independent contractors, companies can provide lower bids on construction jobs and beat out competitors who do it by the books, said Brian “Andy” Anderson, owner of Linden Steel, the Mesquite rebar company.

They have little risk of getting caught. For years, enforcement has been a low priority for regulators, said Belt, the former investigator for the U.S. Labor Department. He’s seen the shift in enforcement and compliance activity up close because he worked as a consultant until a few years ago when he retired.

“In decades past, this problem wasn’t as serious as it is now,’’ Belt said.

And even if a contractor is caught cheating, it’s not unusual for companies caught violating the law to emerge under a new name, sometimes the name of a spouse or another relative, Anderson said.

“All I can say is that the cheats are being allowed to do what the cheats are doing,” Anderson said. “It’s deplorable.”

For federally funded housing projects, the U.S. Department of Housing and Urban Development is supposed to pair up with local government to ensure compliance. The Labor Department’s Wage and Hour Division steps in to help cities, Belt said, because local agencies don’t have enough inspectors to monitor job sites.

But local housing authorities for the most part don’t believe it’s their responsibility to watch out for companies that improperly classify workers. In fact, the Star-Telegram found many didn’t even know it was a problem.

When local housing agencies conduct payroll inspections, they are looking for violations of overtime rules, and they monitor work sites to ensure that workers are paid fair wages. They aren’t looking for companies that try to cut corners by treating employees as independent contractors.

“We’re not sure we want to get into any IRS business,’’ said Brian Gage, senior policy adviser for the Houston Housing Authority, where about a quarter of workers on two projects at a senior housing facility were treated as independent contractors. “That’s even scarier than what we do.”

The role of the local authority is not to verify the accuracy of tax data, said Brian Dennison, vice president of development and asset management for the Fort Worth Housing Authority. The Authority had almost 90 workers treated as independent contractors on its projects.

“We don’t make that distinction,’’ Dennison said.

Lax enforcement

Besides, said Barbara Asbury, senior administrator for the city of Fort Worth department of housing and economic development, the city obtains its powers from the U.S. Department of Housing and Urban Development. The city doesn’t have the authority to go after tax cheats, she said.

That’s not so, according to HUD. The nation’s top housing agency acknowledged that it has that authority. It just hasn’t paid much attention to the problem.

It also acknowledged that it is not providing any training to underlings, which is why so many local agencies don’t understand their role.

Belt also puts some blame for lax enforcement on the Labor Department, which he said over the years had abandoned some best practices and mechanisms that were in place to assure compliance.

“They were completely done away with,’’ Belt said.

To deter violators, the Dallas regional office used to heavily publicize penalties or fines assessed against offenders. That warned contractors that somebody was watching, he said. That’s not the case now.

Another issue, he said, is that over the last decade, fewer investigators are conducting interviews on work sites. Many operate from their computers or from the office, he said.

The agency has been making efforts to boost compliance over the last five years, a U.S. Department of Labor spokesman in Washington D.C wrote in an email to McClatchy Newspapers.

The agency has hired an additional 1,309 investigators and conducted thousands more annual investigations since 2008, he wrote. All over the country, it has sponsored tens of thousands of outreach events to educate employees, community groups and the industry.

“WHD is committed to increasing public awareness and compliance with federal wage and hour laws,’’ the spokesman wrote.

Missing clues?

The agencies that are supposed to watchdog the projects could find a strong clue to potential violators in the certified payrolls that contractors must provide to the local agencies and the federal government.

In payrolls the newspaper reviewed, many contractors who didn’t consider the hourly laborers or mechanics who worked for them to be employees left the forms blank or put “0” in the column for deductions. Some offered explanations such as “1099” or wrote “independent contractor” across the payroll form.

Too many 1099s slashed across the payrolls in a single job should put up some red flags, said Catherine Ruckelshaus, general counsel and program director for the National Employment Law Project in New York.

“Especially on these federally funded projects where payroll records have to be certified and submitted, it’s all right there,” Ruckelshaus said. “They just have to put somebody on it and take a look.”

But in Austin, for example, housing officials don’t flinch when they see payrolls with “1099” on them.

“A lot of companies just have a [1099] stamp and that’s allowable,’’ James Teasdale, director of planning and development at the Housing Authority of the City of Austin.

The consultant that Irving hired to oversee the Tudor Estates townhome project said he believes Key Life Homes, Inc., the general contractor, did an adequate job of making sure it followed the rules.

But of all the projects the Star-Telegram reviewed, the one in Irving had the greatest number of independent contractors. Payroll records acquired by the Star-Telegram showed almost 130 workers were treated as independent contractors, from common laborers to drywall hangers to painters and metal and duct workers.

As the general contractor on the project, Key Life Homes, is supposed to sign a contract that states the company will abide by all state, federal and local laws, and require its subcontractors to do the same.

Terry Penn, of Key Life Homes Inc. referred questions to city officials.

“Other than talking to the city, I don’t have anything to say,’’ Penn said.

The city lacked expertise to ensure compliance, so it found a consultant who specializes in the regulations, said Galen Price, Irving’s director of economic development.

“He did the monitoring for us,” Price said. “He would go out and do the site visits and conduct the interviews — all the information that’s required to be done.”

‘Cat and mouse’

Consultant David Jasso said for the most part, Penn’s company assured compliance the best it could.

But he also said the only way to ensure that contractors are being truthful is to spot check tax filings to ensure that they filed 1099s at the end of the year.

“I won’t be able to tell because I don’t do their [the contractors’] taxes,’’ Jasso said.

Most contractors want to comply with the law, he said. But those who willfully try to violate it are harder to catch, he said.

“It’s one of those things like [playing] cat and mouse,’’ Jasso said. “The people who are actually doing it, they know they’re covering it up so it’s hard to catch.”

Other monitors also seemed to miss red flags.

The NRP Group, a prime contractor in Ohio on the $15.7 million Fort Worth apartment complex, hired a full-time staffer to catch subcontractors who violated the law. At the Woodmont Apartments, about a dozen companies brought 100 workers to the project that were treated as independent contractors on payroll. Villegas was among the 36 percent of workers treated as independent contractors at Woodmont.

Asked about the numbers, NRP officials said some of project’s subcontractors hire independent contractors who bring their own tools to the job site, and that its paperwork was approved by the federal Housing and Urban Development agency.

Ruckelshaus says it may be common to have an electrician run his own business, but not the more unskilled trades, like workers who put up sheet rock, painters and dry wall workers.

The Star-Telegram’s examination supported that. Of all the trades, the most often misclassified was drywall, painting and carpentry, payrolls showed.

“If it’s one or two guys coming on to a site, there might be the argument, ‘Yeah, that guy got his own plumbing business and he’s highly skilled. But sheet rockers, they’re almost never running their own business.”

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