Do you know of a janitorial service whose prices are so low you suspect their hiring policy isn’t squeaky-clean? Rest assured, the facility manager who hires them is bound to pay sooner or later. Embarrassing adverse publicity, tarnished reputations, damaged business relationships, costly legal defense efforts, and large civil and criminal penalties are just a few of the problems faced by companies associated with illegal subcontracting, even as an “innocent” second party.
Federal and state officials, with the support of the Obama administration, are starting to aggressively pursue companies that partake in illegal subcontracting to dodge taxes, insurance, and Social Security, and gain an unfair advantage in the marketplace.
What Is Illegal Subcontracting?
Subcontractors are used in our industry to reduce the costs of wages, benefits, and payroll taxes — a practice that is not illegal. However, some contractors take this too far by cutting corners in compliance with applicable labor laws, resulting in significant payroll fraud.
Here are some common forms of illegal subcontracting that harm our industry:
1) Misclassifying Employees
Misclassifying employees occurs when contractors intentionally classify workers as independent contractors as a cost-saving measure, even though by law they meet the definition of employees. Employers who misclassify workers can avoid paying Social Security, Medicare, unemployment insurance taxes, income taxes, and other payroll obligations.
One recent federal study concluded that employers illegally passed off 3.4 million regular workers as contractors, while the Labor Department estimates that up to 30 percent of companies misclassify employees.
Federal and state officials, many facing record budget deficits, are pursuing companies that try to pass off regular employees as independent contractors. President Obama’s 2010 budget assumed that the federal crackdown would yield at least $7 billion over 10 years. More than two dozen states also stepped up enforcement, often by enacting stricter penalties for misclassifying workers.
Real consequences:
- The Times reported a case in California where 300 janitors at two companies were misclassified, resulting in a $13 million judgment against the BSCs.
- California’s attorney general sought $4.3 million from a construction firm accused of misclassifying employees. In April, he won a $13 million judgment when a court ruled two companies misclassified 300 janitors, cheated the state out of payroll taxes, and did not pay minimum wage and overtime.
- The Illinois Department of Labor imposed $328,500 in penalties on a home improvement company for misclassifying 18 workers, saying it pressured them to incorporate as separate business entities.
2) Layering
Layering uses multiple levels of contractors and subcontractors to hide a lack of proper documentation and credentials. In this scenario, the principal contractor is hired to perform work after providing the required certifications and insurance documentation, then subcontracts the work to companies lacking proper credentials—often for less than the original contract.
Real consequences:
- Wal-Mart received an $11 million civil fine, combined with a $4 million criminal penalty, against 12 janitorial contractors for employing undocumented workers.
- A $2 million criminal fine was awarded against an Iowa company for employing undocumented workers.
- Operation Tarmac — a nationwide ICE investigation targeting companies that employ undocumented workers at airports.
3) Ghosting
Ghosting refers to hiring an employee with proper documentation and credentials who then sends someone else to do the work—someone who may be unlicensed and not paid correctly under state and federal law.
Real consequences:
- A $22 million payment was made by several supermarket chains to settle claims of overtime and minimum wage law violations.
Who It Hurts
Illegal subcontracting harms many people and organizations, including honest taxpayers who ultimately cover lost payroll tax revenues, ethical building service companies, and employees who cannot compete effectively against cheating companies.
The consequences of even being associated with an illegal subcontractor can be severe. Not only can the illegal subcontractor face criminal and civil fines, but businesses that hire them can also face investigations and penalties.
Sources
“The Dangers of Illegal Subcontracting: What You Don’t Know CAN Hurt You” Prepared by Building Service Contractors Association International, March 2005 (Email Info@Stathakis.com for a copy of the original article)
“IRS independent worker crackdown could cost BSCs”, AlturaSolutions Communication Monday, February 22, 2010 (Email Info@Stathakis.com for a copy of the original article)
“U.S. Cracks Down on ‘Contractors’ as a Tax Dodge”
By Steven Greenhouse, February 18, 2010 (Email Info@Stathakis.com for a copy of the original article)