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How Illinois and New York Find and Prevent Labor Violations

The states are national leaders when it comes to curbing worker misclassification, when business miscategorize employees as independent contractors, thereby dodging laws that require the payment of state and federal taxes.

By Mike Fitzgerald and Ryann Grochowski Jones

 

On an overcast July afternoon, with the clock ticking on their lunch break, men in blue jeans and hard hats filed out of the four-story Fairfield Inn & Suites under construction near Interstate 270.

Jon Gould, a Carpenters Union job site investigator, stood in the parking lot of a nearby filling station and gazed at the half-finished motel.

Three months earlier, on a hunch, investigators from Gould's union had started videotaping the people building the motel.

The surveillance was taking place to answer a big question: Was Road Runner Construction, of Little Rock, Ark., the motel framing contractor, trying to get away with a practice known as misclassification? Repeated countless times nationwide, often with impunity, the practice enables dishonest companies to underbid honest competitors by categorizing employees as independent contractors _ thereby dodging laws that require the payment of state and federal taxes.

Last year, Illinois toughened its employee classification law by increasing potential financial penalties for construction companies that wrongly classified workers as independent contractors. "This is going to be a test case for us," Gould said. "This is the first one we submitted since the law was toughened."

Illinois and New York are national leaders when it comes to curbing worker misclassification. Their efforts were highlighted by a recent review of payroll records on large, publicly financed projects conducted by reporters for McClatchy and ProPublica, an independent nonprofit news outlet, in both states.

While North Carolina and other Southern states have misclassification rates on publicly financed projects approaching nearly 40 percent, the reporters in Illinois and New York combed through payroll records for dozens of projects and found not one instance of a company wrongly listing its employees as independent contractors.

It's no accident. Illinois and New York have passed hard-nosed laws and formed task forces to take an aggressive tack toward employers who misclassify their workers.

By executive order, New York state created its Joint Enforcement Task Force in 2007, partly in response to a Cornell University study that showed nearly 1 in 10 audited employers in New York were improperly listing workers as independent contractors.

"I think the state of New York and the state Labor Department deserve a lot of credit for recognizing that this was a really big issue when they did," said Linda Donahue, senior extension associate with the Worker Institute at Cornell University ILR School and a co-author of the study. "They didn't let any moss grow. They got right on it, and clearly it's made a difference."

The difference can be counted in billions. Since its inception, the task force has uncovered more than 114,000 cases of worker misclassification, adding up to almost $1.8 billion in lost wages. Last year alone, the task force found more than $333 million in unreported wages.

Illinois' crackdown on misclassification got a big boost in 2012 with the creation of a task force that consists of the state attorney general, the Workers' Compensation Commission and the state Departments of Labor, Revenue and Employment Security. All share information about suspected violators and work together to ensure guilty parties pay up.

The changes seem to be working. Illinois is second in the nation in the number of misclassified workers detected per audit, according to the state Department of Employment Security. More than 9,000 Illinois workers were identified as misclassified last year, resulting in the collection of more than $2.3 million in unreported taxes.

To make the case against Road Runner Construction, Gould and his team of investigators staked out the site in Pontoon Beach where the company is building the new Fairfield Inn. During regular day and night shifts beginning in April, the union reps videotaped the construction workers when they drove up in the morning from the nearby motel where they were staying, and then videotaped them when they left the job site at night.

"Sometimes they'd sit at the Taco Bell," Gould said of his investigators. "Sometimes they'd sit at the McDonald's."

The union reps took down license plate information and learned the workers were from out of the area, Gould said. They watched as all the laborers were put up at the same motel, and learned from informal conversations with the men that they were all taking direction from the company and otherwise being treated as employees, according to Gould.

The presence of out-of-state workers on a job site represents a red flag to union inspectors such as Gould. The fact that these workers are brought in from hundreds of miles away is, based on past experience, a key tip-off for Gould that a project contractor may be engaging in dishonest practices, including misclassification and paying substantially less than the local prevailing wage.

Record searches showed that Road Runner isn't licensed to do business in either Illinois or Arkansas. For Gould, that provided a key piece of the puzzle: If Road Runner wasn't registered to do business in either state, then it couldn't be documenting its workers' salaries and payroll deductions with W-2 forms. Instead, they'd be relying on 1099 tax forms, which go to workers categorized as independent contractors.

"Once we knew that, we knew they were 1099-ing or paying cash," Gould said.

In May, Gould turned over to the Illinois Department of Labor the evidence his investigators had compiled of violations they said they'd documented at the Fairfield Inn site. The state Labor Department later conducted its own on-site investigation, with state inspectors interviewing workers.

Neither Road Runner nor the site's developer, Sam Patel, returned calls seeking comment. The Illinois Labor Department has declined to comment on where its investigation stands.

(Fitzgerald reported from Illinois for McClatchy's Belleville News-Democrat; Jones reported from New York for ProPublica.)

 

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