Could the state of Louisiana use an extra $100 million or so? Some people say cracking down on employers who don’t pay taxes on their workers might be one way to get the money.
“They want to cut higher education spending in the state,” says Charlie Manning of the Louisiana Carpenters Regional Council. “If they would actually go out and enforce the law, they wouldn’t have to keep coming to the well for the regular citizen who is paying his taxes.”
Manning is talking about employee misclassification—1099 fraud—in which employers falsely list their employees as independent contractors to get out of paying taxes, overtime and workers’ compensation premiums.
He’s the business development director for a union, but insists misclassification isn’t a union issue. He argues anyone who pays taxes and any business that plays by the rules ought to be as angry as he is. A dishonest contractor can shave 30% or more off his labor costs, often using “labor brokers” as middlemen to recruit undocumented workers from Central America, he says.
“You can imagine how that affects the legitimate companies,” Manning says. “It’s next to impossible for them to compete.” Some contractors say they have to misclassify because “everybody does it,” he says.
“In Louisiana, there’s been very little enforcement in this area historically,” says Chris Broadwater, the director of the Louisiana Workforce Commission’s Office of Worker Compensation.
There has never been a study measuring the impact of 1099 fraud in Louisiana, but Broadwater says it’s “pretty much universally accepted” the problem is most widespread in the building trades. He says Louisiana probably is in line with other states that have estimated 15% to 20% of their employers are guilty—costing the state about $100 million. A lot of the abuse happens in the underground economy, where people work for cash, making estimates difficult. Some researchers have estimated impacts of $278 million in Massachusetts and $400 million in Illinois.
Louisiana ranks as the No. 11 most-expensive state for workers’ comp; employers who don’t pay their share raise costs for everyone else, Broadwater says. Even a legitimate independent contract worker who does mostly manual labor still must be covered by workers’ comp under Louisiana law.
Broadwater says enforcement efforts are being ramped up, and the Workforce Commission is working with the attorney general’s office on some ongoing investigations. The state has field agents who visit and observe job sites, sometimes secretly. Officials have broad authority to make businesses open their books and produce payroll records and proof of insurance. The commission also is looking into developing software to crunch the numbers kept by the Department of Revenue, the state contractor licensing board and other agencies to give investigators a better idea of where to look.
“There are definitely things we can do, and we are moving in the right direction,” he says.
Meanwhile, the carpenters’ union conducts its own investigations. Manning prefers not to give away their tactics, but says everything they do is legal and the information is shared with the relevant enforcement agencies.
The union has called out plastering, drywall and acoustical ceilings contractor Lloyd N. Moreau of Pineville by protesting Moreau job sites at Our Lady of the Lake Regional Medical Center and LSU. A union leaflet calls the company a “bad corporate citizen,” and it says Moreau “does not meet area labor standards” and doesn’t pay state and federal employee wage deductions. Moreau dismisses the accusations.
“Most contractors in our field of work are nonunion, and the last time I checked, we are still a ‘Right to Work’ state,” Moreau says in a written response. “The union is only targeting certain general contractors in the Baton Rouge area, those who are not signatory to an agreement with the union.”
The statement says workers at Moreau’s Baton Rouge jobs are local employees who are well-trained and paid overtime when warranted, and says the company carries workers’ compensation and liability insurance beyond state requirements. Employees even have received bonuses during 53 of the company’s 56 years in existence, Moreau says.
“Our books are open for an audit,” he says during an interview. “Our company’s worked in 38 states, and I’ve never run across it,” he says when asked if he thinks misclassification was a serious problem.
“It is a problem, but I don’t think there’s an easy solution at all,” says one Baton Rouge contractor who asked not to be identified. His company was approached by a labor broker from Georgia, and it seemed like a good deal at first.
“We said, ‘OK, it’s a temp service. They’re going to do all the payroll, the workers’ comp, the OSHA deals, the whole nine yards,’” he said. But he realized something was wrong when the labor provider couldn’t supply workers for jobs on plant sites. Plants have stringent identification requirements for everyone who comes on site, meaning undocumented workers have a tough time getting through the gates.
“The crackdown [by government agencies] is definitely being looked at,” the contractor said. “But enforcement? I don’t know. I don’t see a whole lot of agencies knocking at the door.” He lays much of the blame with U.S. Immigration and Customs Enforcement. “I guess they can’t ship them [undocumented workers] all back,” he says.
Manning says the Louisiana State Licensing Board for Contractors is the first line of defense, and labor brokers are sometimes fined for working as unlicensed contractors. But the board, with less than 25 field inspectors, has been swamped in recent years by the flood of contractor wannabees who descended on the Gulf Coast after hurricanes Katrina and Rita.
“When I was there, for every person who applied for a license, there were four or five that didn’t,” says Chuck Marceaux, the board’s executive director from 1996-2008. “We do regulate them when we catch them.”
Other states appear to be stepping up enforcement. New York, for example, created a multi-agency employee misclassification task force in 2007. A Florida roofing contractor reportedly faces 30 years in prison if convicted of workers’ comp fraud and grand theft. A California court ordered two companies to pay $13.6 million for evading payroll taxes and failing to pay minimum wage and overtime.
In Louisiana, Act 156 of the most recent legislative session says an unlicensed contractor can get up to five years of jail time on top of any fines. But last year, legislation directly addressing misclassification failed. House Bill 1387, which died in committee, would have created new enforcement tools and provided for jail terms of up to 10 years.
Project owners often have a “don’t ask, don’t tell” attitude toward the legal status of the contractors and workers on their job. They just want the work done as quickly and cheaply as possible. The real solution might be holding those owners accountable, Marceaux suggests.
“I believe that with people at all levels of government, there’s a disconnect,” he says. “No one’s taking responsibility or accountability for it. It’s always the other guy.”
