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Unusual partners join to fight tax cheating

An unlikely alliance between business and labor advocacy groups is pushing business-friendly Texas to adopt state and local reforms to bust private companies that cheat on taxes owed to the federal government on public projects.

A number of construction contractors are treating workers as independent contractors rather than as employees, as federal law requires. Companies don’t have to pay taxes on independent contractors, cheating the federal government out of hundreds of millions.

“We are trying to work together to change this industry,’’ said Carlota Garcia, who was among 50 demonstrators at a summer rally to urge the Austin public school system to improve job conditions for workers on public infrastructure upgrades.

Worker advocacy groups say they support the movement because not paying workers and payroll fraud often go hand in hand. They say that a contractor who doesn’t pay his workers is also likely to cheat on taxes.

Business is an unusual partner in such crusade, but the issue is hitting their pockets because tax cheaters can get projects done at lower cost, outbidding competitors who don’t cheat.

Brian “Andy” Anderson, president of a rebar company in Mesquite, a surburb east of Dallas, said some of his competitors use the tactic to win jobs. “Cheaters” are able to come in with a bid that is likely going to be 20 percent below his, he said.

“It’s become my battle cry,’’ said Anderson, a regular at the state Capitol supporting laws that force companies to play by the rules. “My competitors have an unfair advantage when they cheat.”

The issue has gotten popular enough to enlist the support of a who’s who of high-profile developers, including Apple Inc. and Trammell Crow in Austin. The lawmaker who led the charge to create the first state law to bust tax cheaters, enacted on Jan. 1, was one of the industry’s very own — a roofing contractor.

“It’s an unspoken thing in our industry, but we all know how the game is played,’’ said former state Rep. John E. Davis, R-Houston, who is retiring from the Legislature. “Certain contractors, they doctor books and act like they are complying but they are not.”

The two largest construction trade groups representing Dallas and Fort Worth government contractors also have endorsed the new law, which fines contractors $200 for every employee improperly treated as an independent contractor.

Cracking down

All across Texas, city governments are also passing ordinances to prohibit unscrupulous contractors from getting jobs. El Paso is expected to vote on a proposal to create a city registry of local employers that are found to have violated the law and to bar them from future public contracts.

“Texas has a group of contractors in it that haven’t gone over to the dark side yet,’’ said Matt Capece, representative of the general president of the United Brotherhood of Carpenters and Joiners of America, based in Washington D.C. “There seems to be more people in the construction industry in Texas that want to police the industry.”

Under Davis’ law, one contractor had already been penalized by early summer, according to the Texas Workforce Commission, which is expected to issue an enforcement report in November.

Texas’ treatment of tax cheaters also recently forced at least one general contractor to change his business model. Ohio-based general contractor, The NRP Group LLC, hired additional staff to scrutinize the payroll on a Fort Worth affordable housing project built a few miles from downtown.

T. Richard Bailey, a partner with the NRP Group, the general contractor overseeing subcontractors on the $15.7 million Woodmont Apartments, says he wants no part of being on a state blacklist.

“We are certainly aware of the $200 penalty per person that is not classified,’’ said T. Richard Bailey, a partner with The NRP Group LLC, based in Cleveland. To ensure compliance, Bailey’s company hired full-time staff to ensure compliance. NRP Group staff was unavailable to discuss the details of the monitoring, but payroll records obtained by the Star-Telegram on the Woodmont showed that 90 workers on the project were treated as independent contractors.

After the animated rally in front of the Austin school district’s offices, the board of education in June voted to require that contractors pay prevailing wages. The policy covers all construction projects in the school bond program.

Also in Austin, the city passed an ordinance last year that requires independent electrical contractors to be licensed before starting work for the city.

The Austin ordinance came about as the result of clamoring from local business and union leaders, said Chris Wagner, business manager for the International Brotherhood of Electrical Workers, Local 520 in Austin.

Union electricians disguised as workers were dispatched to investigate the issue at several commercial high-rise apartment projects under construction in the heart of downtown Austin. They found that the private companies were cheating on taxes by identifying laborers as independent contractors. Union and nonunion businesses joined to file complaints with state and federal authorities, Wagner said.

The scrutiny is even more intense on publicly funded jobs, such as Austin city buildings, parks and schools, Wagner said.

“Over the last 10 years, we’ve really focused hard on making sure that when companies are bidding or trying to land publicly funded jobs — that we’re out there letting them know that they’re being monitored and we’re going to be watching,’’ Wagner said.

“We’ve turned a lot of them in, and there’s been a lot of them busted for not paying the right wage rates for publicly funded jobs and violating IRS laws by not taking out taxes,’’ Wagner said.

Critics want reform

Some in the industry have criticized reforms such as the $200 penalty for not being tough enough. Critics say that few contractors will get caught, and those who will get caught won’t be deterred by a $200 fine.

Another weakness of the law is that it only applies to government contracts — it doesn’t touch commercial projects, critics say.

What’s more, violators can’t be caught unless someone complains, said Anderson, the owner of the rebar company in east Dallas.

“If I could make one-tenth of one percent more, I would hire 100 people to just go after this stuff,’’ Anderson said.

A better reform may be a program that sets an expectation for developers to raise industry standards, worker advocacy groups said. The Better Builder program, established in 2011 by the Workers Defense Project, has several Austin developers on board, including Apple Inc. The companies have signed an agreement as part of economic development policies adopted by Travis County and the city of Austin in 2013.

“It implements change at the top,’’ said Stephanie Gharkhanian, research and policy director for Workers Defense Project. “The developers are aware of what is broken. They have to see that it is in their best interest to work to improve the industry and to raise standards.

“That’s why it is so powerful.”

‘Build it better’

One muggy mid-morning in June, more than 100 demonstrators were at Cole Park, a few miles from downtown Dallas, to urge a prominent luxury apartment developer to adopt standards under the Better Builder Program. They carried signs that read, “Build it Better!” and “Justice!”

A spokesman for the Altanta-based developer, Gables Residential, said it was working to “advance the conversation” with Workers Defense Project and was committed to a safe and fair work environment for workers.

Violations of the Better Builder agreement could result in millions lost in city subsidies and public assets, Gharakhanian said.

The agreement encourages companies to allow trained monitors from the workers’ group to inspect payrolls and work sites for examples of tax cheating. It also sets the expectation that companies will provide safety training and worker compensation protections.

As monitors of hundreds of payroll documents, group leaders also can help developers collect compensation data that meets federal requirements.

“We identify a lot of it [tax cheating] and we work with the developer and various subcontractors to cure misclassification when we find it on site,’’ Gharakhanian said.

It might be time for the industry to clean house, said State Rep. Sylvia Garcia, D-Houston, who co-sponsored the $200 penalty bill with Davis.

“At least we are getting into the first steps of tackling this issue,’’ Garcia said. “This is not the end of the story.”

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