Key lawmakers in Washington have pledged to look further into a McClatchy report on companies with federal contracts that defied labor laws in order to avoid their tax obligations.
Democrats and Republicans expressed outrage about the investigative findings, including that billions in taxpayer dollars were being squandered by companies on stimulus projects and other federal contracts by wrongly identifying their workers as independent contractors instead of as employees in order to undercut competitors and lower costs.
Congressional aides expect McClatchy’s multipart series, called “Contract to Cheat,” to be the focus of hearings on Capitol Hill after the midterm elections. State leaders have vowed to investigate legislative and regulatory options to combat the practice on government contracts. And business and labor groups say they’ll use the findings to call on their state and federal leaders to help root out bad actors who cheat honest employers out of jobs.
“This series should be a wake-up call for Washington,” said Sen. Sherrod Brown, an Ohio Democrat who has introduced legislation on misclassification that has been stuck in the Senate.
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In the series, which ran this week in The Star, McClatchy reported that the federal government looked the other way in the midst of rife cheating on federal contracts following the 2009 stimulus in the rush to resuscitate an economy on the brink of collapse.
Scofflaws across the country, from North Carolina to Kansas City to California, were able to save 20 percent or more by not paying state and federal taxes. They cheated out competitors and exploited desperate workers, denying them unemployment benefits and often overtime and workers compensation.
“Misclassification of workers has plagued the building trades for years,” said Brown, who plans to reintroduce his legislation later this year. “The practice harms workers, puts legitimate businesses on an unequal playing field, and robs city, state and federal governments.”
Reporters from eight McClatchy newspapers and its Washington bureau, along with ProPublica, a nonprofit investigative news organization in New York, spent a year visiting federal construction sites, talking to hundreds of workers and company bosses.
The practice was so pervasive on federal contracts that billions in potential tax revenues were kept by construction firms and their workers.
“Clearly, there has been inadequate oversight of President (Barack) Obama’s stimulus funding, with lucrative contracts given to tax cheats and the politically favored,” said Rep. Robert Pittenger, a North Carolina Republican who sits on the House Financial Services Committee.
Sen. Bob Casey, a Pennsylvania Democrat who leads Senate subcommittees on employment and workplace safety as well as taxation and Internal Revenue Service oversight, said he hopes the McClatchy series will help bring more attention of the problem to the public and to Washington.
“More tools are needed to round up the bad actors who are gouging workers and taxpayers,” Casey said. He has introduced legislation that increases penalties against those who misclassify their workers.
McClatchy found that regulators at the top levels of the administration, including the Department of Labor and Department of Housing and Urban Development, failed to alert one another of red flags or to share key information that could stop the tax cheating.
Legislation introduced by Casey and Brown has yet to gain the needed bipartisan support. Casey also blamed Republican senators for blocking the appointment of a new wage and hour administrator at the Department of Labor for six years, which he said made addressing the problem of worker misclassification and payroll fraud even more difficult.
Economist David Weil, who has written extensively on misclassification, was confirmed earlier this year.
Weil said in a statement this week that the Labor Department appreciated the attention the McClatchy investigation brought to misclassification, “which is a serious problem for workers, employers and the economy.” Weil said the agency is using every enforcement tool at its disposal.
Still, he said, officials are looking for new ways to combat the problem, including stronger enforcement mechanisms. He said the agency also is increasing educational opportunities for employers to help them understand and comply with the rules.
“At the end of the day, having a federal contract is not a right and comes with significant responsibilities for those employers to be in compliance with basic labor laws,” he said.
Some state leaders pledged to try to rid their communities of misclassification. And some business and labor groups said they plan to use McClatchy’s investigation as they prepare for upcoming legislative sessions.
In North Carolina, where McClatchy found some of the highest rates of misclassification, Gov. Pat McCrory, a Republican, pledged his support of a bill that would make the practice a violation of the law with criminal penalties. Attorney General Roy Cooper, a Democrat likely to run for governor in 2016, said he has committed lawyers in his office to figuring out how to help revenue officers and housing officials see whether they can address the apparent misclassification on government projects reviewed by reporters in the state.
The series was to be part of discussions this weekend held by the regional council for Georgia, South Carolina and North Carolina of the United Brotherhood of Carpenters, the organization said.
Gregg Warren, president of a Raleigh, N.C.-based housing nonprofit called DHIC that develops affordable housing projects, said he’s meeting with his general contractors and some subcontractors next week to see what can be done. He raised the possibility of issuing mandates that all workers be employees unless proven otherwise. But he said that would be difficult for his nonprofit to enforce. What is necessary, he said, is stronger enforcement at the state level.
“It doesn’t seem like there is any oversight going on with this,” Warren said.
Carol Bowen, vice president of government affairs for the Associated Builders and Contractors Florida East Coast Chapter, said she plans to pass out copies of the McClatchy series next week at a strategy meeting to prioritize goals and needs to take to elected officials.
The group wants lawmakers to find ways to stop bad actors who undermine their members, she said. But Bowen also wants lawmakers to be careful not to overreact with legislation that would add onerous paperwork for honest businesses. She said miscreants won’t follow the rules anyway.
“Rules and regulations only impact those who follow rules and regulations,” she said.
To reach Franco Ordonez, send email to email@example.com;Twitter: @francoordonez.