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Whether in boom times or down periods, some construction firms deliberately misclassify their workers as freelancers.
It is a world that some Utah labor leaders, particularly those in the booming construction trades, want to bring into the light after years of ignoring the problem. They are mobilizing so they can help level the playing field for legitimate companies that often find themselves outbid for work by unscrupulous, cut-rate competitors.
The issue also has caught the attention of Attorney General Mark Shurtleff, who is pressing for more resources so his office can pursue enforcement of laws designed to halt the practice.
"There is this dark and dangerous side to the construction industry," said Brandt Goble, field representative for Local 77 of the International Union of Painters and Allied Trades in West Valley City. "In some cases, companies deliberately misclassify their workers as independent contractors - freelancers - so they don't have to pay things like payroll and unemployment tax and workers' compensation."
When workers get classified as independent contractors, the companies that hire them aren't responsible for withholding state or federal taxes. Rather, the workers become obligated to see that their taxes are paid, yet often they don't, which can give them access to steady
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Added to this is the fear that some companies might be engaging in this practice to exploit undocumented immigrants, who often have no choice but to work off the books.
"We hear all the time about companies that tell their people that if they don't want to work for cash, or they don't want to accept what they're being paid or their working conditions, that they can just leave," said Ed Mayne, president of the AFL-CIO in Utah and a state senator representing West Valley City.
Whatever the companies' motivation, Utah and other states nationwide are trying to deal with a problem that is costing them millions, maybe billions, of dollars.
One study, for example, suggests that misclassified workers are costing the state of Illinois nearly $100 million a year in lost workers' compensation premiums, with close to $25 million underpaid by that state's construction industry alone.
"It is a problem across all industries, but there seems to be a stronger underground economy in the construction industry," Mayne said. "And that is where we [in Utah] want to focus our efforts."
Mayne emphasized that union and nonunion companies are eager for the problem to be resolved.
"If any employer - and it doesn't matter whether their workers are organized or not - plays by the rules and gets underbid on a job by an unscrupulous operator, then everybody gets hurt - the legitimate, decent employer, the people who are working there," he said.
Taxpayers, too, are affected. They often have to pick up the slack with higher taxes when local, state and federal governments aren't getting the revenue they are entitled to collect, Shurtleff said.
"This is a billion-dollar problem nationwide, and it is as big here as anywhere else," he said.
Shurtleff conceded that there already are laws in place to address the problem but that the Attorney General's Office hasn't aggressively pursued companies that deliberately misclassify their workers because of a lack of resources.
He is hoping the Legislature's Business and Labor Interim Committee agrees later this month to establish a study committee that would determine the scope of the issue's effect on the state, with an eye toward providing his office with the additional funding to hire a tax fraud investigator and prosecutor to tackle the problem.
The prosecutions that could result "would more than pay for themselves," he said.
Painters Local 77 Business Manager William Hayden said the data he has seen suggest that companies can save up to 30 percent on their labor costs by misclassifying their workers and paying them in cash.
And it is difficult to compete with such companies, said John D. Grow, the owner of Grow Painting in West Jordan.
"I can complete with those companies that are playing by the rules just like I am," Grow said. "But it is tough when you're having to pay for overhead - offices, trucks and equipment - and getting outbid by someone who is working out of the back of their truck."
Grow said he rarely, if ever, has seen the state's general contractors misclassifying their workers as independent contractors. And when they do hire subcontractors as independent contractors, they almost always check to make sure those subcontractors are licensed to perform the work for which they were hired and that they carry workers' compensation insurance.
Where the problem often occurs is when some subcontractors turn around and misclassify their own workers as freelancers, or independent contractors, Grow said. "Then all of a sudden you have one [subcontractor] paying the taxes for themselves, while everyone else may be working for cash."
Generally, freelancers must work independently of those who hire them. Although they are paid to perform a job, they typically are unsupervised, set their own hours, direct their own work and often provide their own tools.
And those requirements often can run afoul of the demands of many jobs in the construction industry, said Goble at Painters Local 77.
"You can have an independent contractor coming into a home and laying carpet or tile, and no one would have any problem with that," he said.
Problems arise when companies bring in whole crews of supervised workers to perform a job, give them the equipment to use but then misclassify each laborer as an independent contractor.
"We're seeing more instances of misclassified workers all the time," Hayden said. "Those companies that engage in the practice use it to make as much money as possible when the construction industry is booming and to survive when the industry slows down."
When the number of companies misclassifying their workers is growing, other companies may be tempted to do it too just to be competitive, he said.
"That kind of abuse needs to be cleaned up," Goble added. "This is really all about making the industry better and caring for those who work in it."
steve@sltrib.com
