How Stimulus Money Went to Companies That Rob State and Federal Treasuries of Billions Each Year

by | September 8, 2014

By Franco Ordonez and Mandy Locke

The largest government infusion of cash into the U.S. economy in generations _ the 2009 stimulus _ was riddled with a massive labor scheme that harmed workers and cheated unsuspecting American taxpayers.

At the time, government regulators watched as money slipped out the door and into the hands of companies that rob state and federal treasuries of billions of dollars each year on stimulus projects and other construction jobs across the country, a yearlong McClatchy investigation found.

A review of public records in 28 states uncovered widespread cheating by construction companies that listed workers as contractors instead of employees in order to beat competitors and cut costs. The federal government, while cracking down on the practice in private industry, let it happen in stimulus projects in the rush to pump money into the economy at a time of crisis.

Companies across the country avoided state and federal taxes and undercut law-abiding competitors. They exploited workers desperate for jobs, depriving them of unemployment benefits and often workers' compensation insurance.

Exactly how much tax revenue was forfeited on stimulus projects isn't clear. This is: The government enabled businesses bent on breaking the rules. Regulators squandered the chance to right a rogue industry by forcing companies' hands on government jobs.

The scheme persists in federal contracting, while government officials acknowledge the mistreatment of hourly wage workers and steep losses to the U.S. treasury.

The result? In Florida, a McClatchy analysis shows nearly $400 million a year in squandered tax revenue from construction firms and their workers. In North Carolina, nearly $500 million a year. And in Texas, a staggering $1.2 billion.

The problem known as misclassification is so well-understood in the U.S. economy that government has vowed to fix it for years. Federal investigators have hammered private companies doing private work, collecting millions in back wages from restaurateurs, nail salon owners and maid services.

But when American tax dollars are at stake, as with President Barack Obama's economic stimulus package, few in government even talked about the problem, let alone prevented it.

McClatchy's analysis of payroll records for government-backed housing projects shows the federal government losing billions in tax revenue each year from the construction industry alone _ and at a time when states and the nation can ill afford it. As a result, the culprits win, the U.S. treasury goes wanting and workers are left toiling without a safety net.

To understand the national scope and impact of the scheme, McClatchy spent a year reviewing payroll records for federal housing projects in 28 states obtained under the Freedom of Information Act and state public records laws. Most of the projects were paid for in part with stimulus money.

Reporters from eight McClatchy newspapers and its Washington bureau, along with ProPublica, a nonprofit investigative news organization in New York, also visited work sites, spoke with hundreds of workers and dozens of company owners, and interviewed economists, union leaders, policymakers and some of the highest-placed government overseers in Washington.

The investigation found:

  • Companies using stimulus money routinely snubbed labor law and the Internal Revenue Service by treating workers as independent contractors in a clear violation of what's allowed.

  • The scofflaws undercut the bids of do-it-right competitors who refused to push their roofers, painters and electricians off their payrolls and into limbo.

  • Laborers got swindled. They lost unemployment insurance and, in many cases, workers' compensation benefits and fair wages. Some didn't even know they were being hurt.

  • All this happened under the noses of government officials. From the White House down to county-level agencies, regulators could have stopped it. Some top government officials admit they didn't.

The scam is so simple it can be done with the scrawl of a pen. Here's how it works for companies doing public business:

The companies declare on a routine form that the hourly wage earners working for them aren't employees, as laws and several federal regulations require them to be, but rather are independent subcontractors. Those companies then don't withhold income tax or file payroll taxes. They don't pay unemployment tax. And they aren't obliged to provide workers' compensation.

The temptation is obvious: less hassle, big savings. Scofflaws can save 20 percent or more in labor costs by treating employees as independent contractors.

The practice exploits workers and cheats the government of tax revenue; it also runs afoul of a host of labor laws and IRS regulations. No single factor determines whether a worker must be an employee.

McClatchy reporters showed samples of the payroll records to more than a dozen current and former labor investigators, IRS auditors and lawyers who handle labor disputes. They all doubted that company owners would be able to justify treating the workers listed there as independent contractors.

Those working to rid the construction industry of misclassification were astonished this practice passed muster on federal jobs.

"So we the taxpayers are paying the tax cheaters who are exploiting their workers and stealing work from law-abiding employers?" said Matt Capece, a lawyer with the United Brotherhood of Carpenters and Joiners of America, after reviewing payroll records collected by McClatchy.

"No wonder the bad guys are running roughshod over the industry," he said.

(Locke reports for The News & Observer in Raleigh, N.C. Yamil Berard of the Fort Worth, (Texas) Star-Telegram, Nicholas Nehamas of the Miami Herald and David Raynor of The News & Observer in Raleigh, N.C., contributed to this report.)