Construction companies call workers 'owners' to dodge millions in costs
State officials have cracked down in recent years on new ways some construction companies mis-classify their workers to unfairly lower the cost of doing business.
One key weapon in the campaign: professional licensing.
Most of Utah's problems with worker mis-classification center on the industry practice of labeling construction employees as owners or independent contractors to avoid paying workers compensation, unemployment insurance premiums, payroll taxes and other costs.
A tactic emerging recently has involved limited liability corporations, or LLCs, a kind of business entity designed to shield the personal assets of company principals from lawsuits. Some builders have created multiple LLCs at a time in order to classify hundreds of workers on their payroll as owners or members, sidestepping costs.
Officials say hundreds of construction firms have deployed these strategies over the years. The mis-classifications have affected potentially thousands of workers, given owners as much as a 20 percent cost advantage over competitors and severely bled taxpayers.
"There's no question it runs into the millions of dollars,'' said Alan Hennebold, a Utah Labor Commission deputy commissioner and general counsel.
Prompted by concerns among small construction firms in Utah, the Legislature created an enforcement council in 2011 to attack the problem. Along with the Labor Commission, regulators with the state Department of Commerce, the Utah Tax Commission, the Department of Workforce Services and the Utah attorney general meet monthly to share data as they investigate businesses suspected of cheating.
"Money is one thing, but the fundamental fairness at stake is even more important,'' said Hennebold, who heads the enforcement council. "You can't have a system where people who play by the rules are suckers and are at an economic disadvantage at the hands of people who don't follow the rules.''
Federal labor authorities attend the meetings as well. Agencies are pooling investigative methods and swapping wage, unemployment, licensing and other business information to pinpoint the worst offenders. They've discussed using tax records as well, but individual taxpayer data remains off-limits due to privacy protections.
Officials rely heavily on state licensing rules enforced by the Division of Occupational Licensing, or DOPL, to help them go after violators.
Changes in 2011 tightened definitions of employees and owners for licensed construction companies, set new reporting rules and provided for state auditing to verify financial responsibility. Licensing disclosure rules give officials a crucial glimpse into how companies operate, as well as a squeeze point when their practices are out of bounds.
"Licensing really is the focal point,'' said David Spatafore, a lobbyist for the Utah Construction Coalition, a consortium of small builders that backed the changes. "Every construction company has to have a license.''
Stepped-up enforcement since 2011 has pushed scores of companies to either comply or go out of business, according to the panel's reports to state lawmakers and Gov. Gary Herbert. On top of avoiding workers comp and unemployment costs, some violators are using mis-classification to skimp on minimum wage and overtime pay and even dodge protections for employee safety and health, officials say.
Francine Giani, executive director of the Utah Department of Commerce, which oversees DOPL, estimated the council's work has returned about $1.3 million to state coffers.
Spatafore said numbers such as that have won support from influential leaders in the food, mining and manufacturing industries in Utah, as opponents of worker mis-classification built a case that the practices unfairly push costs onto all business owners.
The Legislature tightened reporting rules further this year and required that companies meet new standards when they transfer construction licenses. Lawmakers also authorized the enforcement council for another three years.
Some view those moves as a sign of the council's success. Regulators also have been bolstered by a recent ruling in a hard-fought case against Pleasant Grove construction firm Universal Contracting over its refusal to disclose financial information on what it claims are hundreds of company owners.
Attorneys for Universal said DOPL's insistence that it prove financial stability of its owners amounted to the company being singled out because it operates as an LLC.
But a March 12 order by the Utah Construction Services Commission, which sets standards for construction licensure, upheld DOPL's demands. Universal Contracting's license is now on probation for a year, and it has been ordered to submit credit reports, birth dates and other information for all its current owners.
Such developments "suggest positive change,'' Giani said, but she was reluctant to conclude the council's efforts are working. "It would be up to the Utah Legislature,'' she said, "to decide whether or not the council they put in place is effective."