Department of Labor Joins States in New Crackdown on Wage Violations

Secretary of Labor Hilda Solis last week announced [1] a new state-federal program to crack down on a form of payroll fraud that has run rampant over the last decade. Absent stronger enforcement of labor standards, employers are going to great lengths to cash in by defrauding their workers and leaving taxpayers with the bill. Just this week, a NYC construction firm has been accused [1] of using front companies to dodge union contracts. The unions allege the company used low-wage workers to pocket $7 million in wages and benefits from 2007-2011.

A much more common and mundane way for employers to pad their bottom lines is by misclassifying employees as independent contractors. Through misclassification, companies can simultaneously defraud workers of minimum wage and overtime and dodge a variety of state and federal taxes: payroll, income, unemployment insurance, and workers compensation. Prosecuting the practice, and deterring employers from engaging in it, is both a vital way to protect working families’ economic security and an important measure to alleviate state and federal revenue crises.In just one example, forty-four restaurant workers in Boston won [2] $219,000 in back wages this year, due to a US Department of Labor (USDOL) investigation found they had been misclassified. But such cases are just the tip of the iceberg:

• California recovered [3] $112 million in unpaid income taxes from audited employers in 2007.
• According to the Government Accountability Office, misclassification cost [4] the federal government an estimated $2.7 billion in 2006 alone.
• In 2000, USDOLestimated [5] misclassification cost states $198 million in unemployment insurance contributions.

Under the new program, USDOL is signing agreements with eleven states (see below) to share information on misclassification cases; USDOL will also provide the information to the Internal Revenue Service for collection of unpaid federal taxes. Inconsistencies in federal and state statutes, in addition to inadequate staffing capacity for enforcement, have contributed to the rise in payroll fraud and other forms of wage theft. For instance, since 1941, the number of USDOL investigators per employee in the workforce has decreased by 95% — from one investigator per 9,000 employees to one per 170,000. State government surveys and audits have revealed alarming trends in the incidence of payroll fraud. A 2010 Indiana [6] study estimated 47.5% of employers in the state misclassified at least some employees, affecting 418,000 workers and costing the state $407 million in lost revenue. While reported incidence rates vary widely, most of the state-level studies are not able to capture employment in the underground economy, where misclassification is most prevalent.

Most of the participating states have recently enacted laws to address misclassification, either broadly or by targeting industries like construction or shipping where payroll fraud is especially common. Best practices address the problem by providing for both stricter enforcement and clearer and more consistent standards defining independent contractor status. Although the practice is impossible to defend and prosecuting it enjoys strong support among workers and law-abiding employers alike, business lobbies and major corporations like FedEx [7] are taking advantage of the down economy and conservative political gains to roll back efforts to crack down on misclassification. For instance, one of Maine Governor Paul LePage’s first acts on taking office was to disband [8] an interagency task force established to enhance enforcement.

In March, Maryland slipped backward by enacting a bill (SB 685 [9]) making it easier for shipping and delivery companies to classify workers as independent contractors — essentially legalizing misclassification in the industry. Just two years ago, the state enacted the Workplace Fraud Act (SB 909 [10]) against misclassification in construction and landscaping. But even that gain could be compromised by the new law, which, according [1] to the National Employment Law Project, could “create confusion for entire sectors, whose employers may suddenly decide to require ‘independent contractor’ agreements as a condition of getting a job in order to evade [unemployment insurance] requirements.”

Innovative efforts to address payroll fraud include linking employee-status requirements and green jobs initiatives. The Clean and Safe Ports [11] campaign is promoting a package of environmental and labor standards for the nation’s major shipping ports to reduce air and water pollution and address misclassification [12]. Short-route delivery drivers are often forced to idle in long lines for hours before driving short distances to transport goods from the port to a distribution facility. Employers misclassify the drivers, and charge them for use and maintenance of typically old and poorly maintained trucks, resulting in excessive air pollution and frequently below-minimum wage [11] pay. The Port of Long Beach’s Clean Truck Program [13] requires delivery companies to classify drivers as employees and has reduced emissions by 80%.

States partnering with USDOL: Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah, and Washington. New York and Illinois plan to sign agreements soon.