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There’s a plague infiltrating the construction industry. It’s payroll fraud, and it’s rapidly sickening honest employers and harming construction workers. The most common strain of payroll fraud is misclassification of workers, and although it’s not preventable, it can be controlled – unfortunately, not before it causes trouble.
What is meant by the “misclassification” of workers?
Construction workers are either true employees paid through a W2 or independent contractors, aka 1099 employees. The misclassification occurs when unscrupulous employers or contractors intentionally classify workers as 1099 employees to avoid paying payroll taxes, unemployment insurance and workers’ compensation. When they don’t pay those costs, they’re able to submit lower project bids and undercut responsible firms in the construction industry. This type of payroll fraud also enables construction companies to take advantage of those – often undocumented – workers by paying them bare-bones wages. They may also pay workers “under the table,” which alters the numbers in their books.
How payroll fraud affects workers in the construction industry
An independent contractor does not get the benefits and protections that W2 employees get, such as minimum wage, overtime pay, workers’ compensation, unemployment insurance, family leave, health care and safe workplaces. Some 1099 construction workers are not even covered by the National Labor Relations Act, established in 1935 to allow collective bargaining and the right to form labor unions.
Effects of payroll fraud to the “good guys”
Those employers that believe that “honesty is the best policy” are being hurt by the actions of dishonest employers. Payroll fraud pushes the market down and costs the good guys in terms of lost revenue and higher taxes. Payroll fraud sometimes forces honest construction companies to reduce benefits for their employees because they are seeing significant business loss that affects their bottom line. The construction industry is particularly vulnerable to payroll fraud – especially in the residential sector because of the relatively low costs, quick project turnover time and low labor union density.
What the unscrupulous contractors gain by engaging in payroll fraud
Payroll fraud can garner a tax savings of 30 percent or more to contractors willing to scam the system by misclassifying construction workers. Many operate in sort of an underground economy whereby they fail to report all (or a great percentage) of their workers to the IRS, thus reducing their labor costs. What makes the construction field so vulnerable to payroll fraud is because of its competitive nature, the mobility of both the employers and the workforce, the relatively temporary nature of the work, and the multiple layers of contractors and subcontractors.
How companies get away with payroll fraud
They often avoid being detected because hiring out is a common practice among dishonest contractors in the construction industry. They stay out of the law’s eye by pushing the hiring responsibility onto the subcontractors. In addition, investigations into payroll schemes take so long that the job is often done before it’s been looked into. The contractors may get fined, but they think of it as the cost of doing business.
How to handle payroll fraud
The trades unions can be the saviors against payroll schemes. They’re in a really good position because they often have access to the victims – the construction workers who have lost wages and benefits and the employers who want to operate their businesses legally. One of the best things labor union workers can do is raise awareness of the problem of payroll schemes. According to a survey by the National Consumers League (NCL),
- Two in three Americans (65 percent) have never heard of misclassification of employees.
- Once they become aware, nine out of 10 (90 percent) oppose the negative consequences deliberate misclassification has on workers and taxpayers.
- Of those who oppose employee misclassification, 93 percent believe the violators should face fines and penalties.
- Approximately 95 percent believe that a worker should be informed in writing at the beginning of employment if he or she has been classified as an independent contractor.
Payroll fraud is bound to happen, but since 2003, more than 30 states have passed legislation against it. That’s a good start.
How labor unions can help all workers – members or not
Because of their collective bargaining efforts, labor unions have been able to secure protections and rights through legislation for all employees and construction workers: safety, health care, overtime pay, family/medical leave. Generally, labor workers are more informed and are more likely to receive benefits from programs such as unemployment insurance and workers’ compensation. They also reduce wage inequality by increasing pay for low- and middle-income workers and other blue-collar employees without college degrees.
Labor unions are important for workers throughout the United States. To learn more about unions and payroll fraud, contact Labor United.