Industry Voices: The Threat of the Underground Economy: Beyond White Collar Crime

Jose and Arturo asked their boss for the money they were owed for working the previous two months. Don Milton reached under his jacket and removed his gun from its holster and placed it on the table in front of them. “Do we still have anything to discuss?” he asked the workers. Jose and Arturo shook their heads “no” and returned to work.

Every contractor understands the challenge of winning a bid in this difficult economy. Jobs are sent out by general contractors for second or third bids in an effort to cast a wider net for cheaper options. Estimators run their numbers repeatedly to see where they can peel back the numbers just a little more to secure another bid. For property owners this can be positive. If anything, this economic recession has created a much tighter, more competitive bid process. However, all of the work to tighten up bids amounts to nothing when an honest contractor is up against a cheater.

The underground economy is the single issue that will make or break this industry for law-abiding contractors.

By Any Other Name

What is the “underground economy?” The workings of the underground economy go by many familiar names; “misclassification fraud,” “cash economy,” “under the table work,” “wage theft,” “1099’ers.” Public and private agencies have done studies of wage cheating throughout the United States. Estimates of lost legitimate wages and government revenue loss vary, but most studies agree that the total reaches into the billions of dollars.

In construction, the underground economy refers to contractors who cheat workers out of pay and defraud the government of taxes and other state revenue. However, this problem is not limited to misclassification, taxes or wage and hour issues. This complicated web can involve organized crime and even violence.

Common underground economy violations range from basic wage claim issues to extensive white collar offenses and violent crime. Some examples of underground economy violations are: payment under minimum wage, no overtime pay, no pay, accident/injury fraud, kickbacks, illegal deductions, unfair labor practices, violence, contractors with no licenses or permits, extensive safety violations, prevailing wage cheating, misclassification, child labor, tampering with government records, racketeering, apprenticeship requirements ignored, drugs/human trafficking, use of labor brokers and more.

Labor Brokers

What is a “labor broker?” A labor broker is also known as a subcontractor or coyote. A labor broker is essentially a middleman that an unscrupulous contractor uses as a second or third tier sub to supply workers and cut wages. Meanwhile, the primary subcontractor hopes to avoid lawful responsibility for his employees while also skirting federal and state regulations. Many subcontractors use labor brokers to provide and manage their labor force. These labor brokers tend to drive down wages, evade taxes and undercut the worker protection laws in general.

A labor broker will sometimes use a business license, though not always. Labor brokers typically use kickbacks and various forms of wage manipulation to steal wages and cheat government of taxes and revenue. Labor brokers are often in cahoots with check cashing schemes involving businesses and banks. Some labor brokers traffic drugs, as well as workers. Some labor brokers use violence, drugs, threats and organized crime to maintain a position of power over workers.

“Octavio got hooked on drugs when his foreman gave him cocaine at work and told him it would make him work faster and he wouldn’t get so tired. Octavio was fifteen years old when he started hanging drywall for this company. He finally came forward to tell the truth about the company. When the contractor found out, they sent him on the road to a faraway job with the promise of steady work. Octavio was frightened that the contractor would physically harm him and had been hearing rumors from co-workers to that effect. He came to his senses, turned the car around and sought protection from the government.”-Drywall hanger, 2010

Many workers have reported that they have experienced some level of physical threat to stay quiet about their stolen wages.

An Invisible Problem

Over the last several years the underground economy has been monitored and fought by public and private agencies on a case-by-case basis. It has remained largely below the radar of the general public. Wage theft is a nightmare for general contractors and property owners who often get stuck with property liens.

“Contractors are increasingly shorting employees on hours or simply not paying at all. Workers regularly report that employers plead poverty and refuse to pay after the work is complete. A contractor’s timesheet states “We do not pay overtime” across the top in bold letters.” -PNWRCC union representative, 2010

In order to make a dent in the underground economy we have to understand the criminals and their connections. For example, there are two major labor brokers who operate in Washington and Oregon State. Marcos and Miguel use a variety of contractors’ licenses. They also have a string of companies to whom they regularly subcontract. They are known for prevailing wage cheating and physical threats.

“On a job with labor brokers … we were earning piece rate, hanging drywall. We calculated the piece rate with the hours we worked, and found out we were breaking our backs for $5.50 per hour! That was over three dollars below Washington State minimum wage.” –-Anonymous drywall hanger, 2009

Stem the Tide

Strong legislation is an important first step towards changing our industry. The Washington State Underground Economy Taskforce met for several years and successfully passed numerous bills designed to increase enforcement on unscrupulous contractors. Successorship legislation (RCW 51.16.200), helps to track contractors so that their record follows them when they attempt to open yet another crooked operation after closing the original identified one. Responsible contracting and bidding language are two legislative pieces that could make cheater contractors ineligible to bid before they even step up to the plate. Jim Mayfield of the Washington State Institute for Public Policy wrote a comprehensive report on these issues in 2009.

In a recent attempt to impact the underground economy, Department of Labor Secretary Hilda Solis introduced a smartphone app called DOL Timesheet that helps workers track their hours-crucial evidence in any wage claim case. According to the Associated Press, “The app is the latest example of the Obama administration’s push for more aggressive enforcement of wage and hour laws. The agency has hired about 300 more investigators to probe complaints of unpaid work time, lack of overtime pay and minimum wage violations.”

Justice Swamped is Justice Denied

The DOL also initiated the “Bridge to Justice” program that helps aggrieved workers find private lawyers if the department’s Wage and Hour Division is too busy to handle a complaint. This tends to be a major problem in enforcement: the reality that our public agencies cannot handle the caseload that comes with so many violations. Private organizations must partner with public agencies on enforcement and information pooling.

Legislation is not our only tool. As an industry, we must bolster good legislation by pushing for successful prosecution of cheating employers. We should utilize private and public remedies and push for criminal charges.

In January 2011, Oregon Department of Justice Attorney General John Kroger charged Steve Nagy and his company, S&S Drywall Assemblies, on 24 counts of white collar crime. Among the charges were: criminal antitrust, racketeering, first-degree theft, obstructing administration, tampering with evidence, first degree forgery, conspiracy and money laundering. The company closed after investigators executed a search warrant in October. This is a prime example of cleaning up the interior systems market to make room for law-abiding contractors.

You Can Help

There are five simple steps any contractor can follow in order to keep the underground economy on your radar and make an impact on this serious problem.

- Carefully examine the rock-bottom bids that seem too good to be true (It probably is too good to be true and you will likely get stuck with the bill later, perhaps double).

- Ask workers how much they earn. If a worker does not know what his wage is, it is a red flag for you to investigate the validity of your subcontractor’s operation.

- Make sure that subs are licensed/bonded/insured. If a subcontractor is not legitimate, the contractor above them is responsible.

- Make sure that subs are directing their own employees.

- Make sure that payroll lists and attendance sheets match the number of workers onsite.

To make a lasting impact on the underground economy, it is crucial that we unite as an industry across political and organizational lines. Getting the underground economy under control will be a clear win for contractors who want to compete in a fair market and for workers who want to get paid for their work without fear. The phrase “an hour worked is an hour paid” should be a mantra that workers, contractors and taxpayers can count on.

Note: Some names of workers and contractors have been changed to protect personal identities and lawsuits that are currently in progress.