The Ghost Workers: Part 1

Cheating businesses make it tough for honest employers

mlocke@newsobserver.comAugust 19, 2012 

  • About this series In April, The N&O reported that at least 30,000 North Carolina businesses had not bought workers’ compensation coverage, as required by law. After that report, we heard from workers, lawyers and business owners about deeper problems surrounding laborers and businesses, particularly in the construction industry. To report this series, we reviewed thousands of pages of documents and computerized records and conducted dozens of interviews. To illustrate how the trend of off-the-books workers emerged and the mechanics and cost involved, we focused on the specialty of masonry, though the practice is also common in other trades.
  • More information The series Today: Working off the books Monday: A policy, but no coverage Tuesday: Bureaucrats in silos
  • Employee vs. contractor The federal government estimates that employers who inappropriately classify employees as contractors cost as much as $2.72 billion in lost tax revenue in 2006. Determining whether a worker can be considered a subcontractor (classified in tax code as a 1099 worker) is based on a list of questions that deal with the employment relationship. While some agencies that examine whether a worker is properly classified may have particular standards, many use a 20-question test compiled by the Internal Revenue Service. Questions that would help determine whether a worker is a W-2 employee deal mostly with the employer’s control over the person. Answers that indicate more autonomy generally mean the worker can be treated as an independent contractor. Among the questions: •  Does the employer tell the person when and where to go for work and how to do the work? •  Did the employer train or have another employee train the new worker? •  Did the employer provide tools and other supplies needed to complete the job? •  Is this a continuous or expected to be a continuous working relationship? •  Does the employer dictate hours and approve time off? •  Is the worker expected to devote full time or substantially full time to the work? •  Is the worker required to submit regular or written reports to the employer? •  Is the worker paid by the hour or by the job? •  Does the employer pay travel expenses for the worker? •  Does the worker gain profits or suffer losses as employer does? •  Does the worker work for others as well?

First of three parts

BENSON -- As a commercial masonry contractor, Doug Burton prides himself on being exact.

He counts bricks to calculate estimates. He knows each of his laborers by first and last name. He has memorized exactly what he’ll owe in taxes if he takes on an additional worker and knows week to week whether he can afford it.

Burton strictly follows rules, and until 2009, he made a good living doing it.

As the economy faltered and he and his competitors fought for scarce projects, Burton lost his footing. Time and again, his company, Whitman Masonry, got beat on bids, often by a hefty margin.

As the end of 2010 neared, he had shed more than half his labor force. He couldn’t figure out what he was doing wrong.

“Finally, it just dawned on me,” Burton said. “My competitors were cheating.”

Some of the other bidders were subcontracting their labor needs to middlemen who called their workers independent contractors – or treated them like ghosts, paid under the table and never acknowledged. A single employee cost Burton nearly 20 percent more to pay state and federal taxes, unemployment taxes and workers’ compensation insurance.

Those in the construction industry say the scheme is now prevalent across the trades. A News & Observer review of state Industrial Commission decisions, in which arbitrators sort through workers’ compensation claims, shows the practice is common and has penetrated other industries.

The cost is huge in unpaid medical bills for injured workers, uncollected business and personal taxes, and payments not made to a depleted state unemployment reserve.

As honest businesses have struggled to compete, North Carolina officials have barely paid attention.

The state’s leaders have imposed requirements on business owners through the years, requiring them to buy workers’ comp insurance, pay taxes and unemployment insurance, and maintain a safe workplace. But state regulators work in the silos of their own agencies, rarely sharing information that would enable investigators to detect businesses determined to cheat.

As a result, those who play by the rules say they struggle to stay afloat while competitors who break the law profit. And their workers are left vulnerable, facing untreated injuries if they are hurt on the job and financial hardship if they get laid off.

“There is no risk in running this game,” Burton said. “It seems they never get caught.”

‘They wash their hands of it’

Burton, 54, learned to be exacting as a young man, studying engineering at Virginia Military Institute.

The trait served him well when a business associate offered him a chance to invest in a masonry company in the fertile Triangle market.

Burton took to the field: troubleshooting renovation plans, training and hiring workers, getting involved in the professional association. In 1990, he bought half of Whitman Masonry, and when founder Mackie Whitman retired in 2008, Burton took over.

Through the years, Burton’s crews have helped build schools and banks and office buildings. At its height, Whitman Masonry had a crew of 75 workers building multimillion-dollar projects.

But as the recession rocked the building industry and jobs dried up, Burton worked hard to hang on to his crew. Meanwhile, his competitors shed workers in favor of subcontractors who promised laborers as needed.

“They wash their hands of it and (don’t) know what’s going on,” Burton said.

Burton resisted the trend. But as the economy limped in 2009, so did his company.

“We’d come to work Monday feeling good because we had two jobs to bid,” Burton said. Days later, he said, they were deflated, having lost the jobs.

Burton started trimming. He gave up Hurricanes hockey tickets. He eliminated dental insurance and the 401(k) match for employees. He cut his salary by a third and laid off a few dozen laborers. Just before Christmas in 2010, Burton called the remaining crew together for a meeting.

“I told them we simply couldn’t compete,” Burton said.

Burton explained why as best he could. He ticked through all the taxes he pays for employees and the workers’ compensation insurance he buys. He told them he suspected other bosses weren’t swallowing those costs.

Burton asked his employees to name names.

Workers without withholding

Sabas Martin Galeana and his crew have helped build some of the most significant construction projects in the Triangle and counties to the east.

His masonry company, Martin’s Bricklaying, has built university dormitories, renovated N.C. State University’s Carter-Finley Stadium and, in 2010, Kenan Stadium at UNC-Chapel Hill. He has built schools, hospitals and grocery stores from Roanoke Rapids to Wilmington.

And in 2010 and 2011, his crews did much of the masonry work at Wake County’s $125 million detention center on Hammond Road.

Martin’s business, however, appears to have violated state and federal laws.

The N&O interviewed four of Martin’s past and current employees, some of whom have worked for him for eight years. A reporter reviewed about 30 pay stubs for several workers from 2006 through 2012, including some collected for a workers’ compensation claim filed for a member of Martin’s crew who worked on the Wake County Detention Center.

Martin appears to have appropriately withheld state and federal taxes in 2006 and 2007 for at least one employee, pay stubs show. In 2007, however, the agency now known as the state Division of Employment Security filed a lien against Martin for unpaid unemployment taxes.

The Internal Revenue Service also came down on Martin between 2003 and 2009, court records show. The agency filed two separate tax liens against him amounting to $70,600 in unpaid unemployment tax, federal taxes and penalties. He settled the last of those liens in 2009.

Pay stubs as recent as July for several of Martin’s employees show that Martin did not withhold any state or federal taxes. State laws say that employers must provide detailed deduction information each pay period when wages are withheld.

Each week, they were handed a simple check from Sabas Galeana and his company. The employees say Martin’s Bricklaying has not been providing tax forms at year’s end so they can pay their own taxes.

Three weeks ago, days after The N&O inquired about Martin’s Bricklaying with the state Revenue Department and the Division of Employment Security, Martin withheld taxes in a paycheck to at least one worker.

Tax revenue lost

By any test of applicable laws, Martin’s workers are direct employees, not subcontractors. They report to jobs he arranges, use his equipment and take breaks when supervisors allow it, workers say.

Not treating them as employees is a big savings of time, money and paperwork. Employers must withhold and pay state and federal taxes for direct, or W-2, employees, pay unemployment insurance and provide workers’ compensation insurance.

All told, that’s about a $110 cost for a single mason working a 40-hour week, according to a review of Burton’s payroll. The cost increases significantly if the laborer logs overtime.

For that same worker, if no taxes were paid by the employer or the worker, the government missed $223 in state and federal taxes for a workweek, or about $11,600 a year.

Martin, a Mexican native who has become a U.S. citizen, is one of at least three masonry company owners around the Triangle that Hispanic masons say skimp on taxes.

Repeated attempts to speak with Martin failed. Two letters, delivered by certified mail, were not answered. Martin’s wife and an assistant said they would give him a message, but he did not respond.

Burton said he finally figured out Martin’s operating methods in February 2011. His brother, who is also in the masonry business, ran into an old employee who was doing work for Martin’s Bricklaying at Kenan Stadium. The worker’s pay stub was basic and simple: a 54-hour workweek netted an $810 check, with no withholding, no overtime pay, no details.

“It was so obvious, right there in the open,” Burton said.

Laborers stay silent

Martin’s business has been fed by contracts with established companies such as Joyner Masonry Works of Greenville and Moxley Masonry of Youngsville. These companies secure multimillion-dollar bids for projects, then contract with Martin to bring laborers to supplement their small crews.

In part, Martin’s business methods are undetected because his workers don’t complain. Nearly all are workers from Mexico who are here illegally.

Employers are required to pay unemployment tax and other withholding on workers here illegally, though those workers are not entitled to collect the benefits.

Facing a shortfall of more than $2 billion in unemployment taxes, state Division of Employment Security officials have ramped up efforts in recent years to detect businesses that misclassify or pay employees off the books. But because Martin’s employees wouldn’t likely come in to apply for benefits they can’t collect, employment security officials miss an important flag.

There is no record of employment security officials or state or federal tax collectors investigating or penalizing Martin’s Bricklaying since 2008. Employment security officials as well as the state Department of Revenue and IRS are prohibited by law from saying whether they are investigating or have investigated Martin’s Bricklaying.

Martin’s workers interviewed for this story say they have no interest in drawing attention to their situation by alerting state agencies that could investigate Martin’s practices.

“We don’t ask questions,” said André, one of Martin’s former employees who is not being fully identified because he’s here illegally. “We don’t complain.”

Such fear is common, said Carol Brooke, a workers’ rights attorney for the N.C. Justice Center.

“It’s a huge problem within the immigrant workforce,” Brooke said. “There’s a lot of fear about reporting it. It’s just a way of marginalizing the workforce.”

The labor broker’s patrons

While his workers fly beneath the radar, Martin has enhanced his business’ visibility.

Last year, his company was certified as a historically underutilized business because he is Hispanic. The designation is awarded by the state Department of Administration and enables him to get preference for bids on state contracts.

The process focuses solely on the owner’s ethnicity or gender, not business operations or performance, said Jill Lucas, spokeswoman for the agency that administers the certification.

As part of Martin’s application, his business associates, Gary Joyner, president of Joyner Masonry Works, and Pat Finegan, a project manager at Moxley Masonry, wrote letters of recommendation. In those letters, both bragged about Martin, saying that they couldn’t be more pleased with his services.

Joyner could not be reached for comment.

Russ Moxley, owner of Moxley Masonry, said he’s sore about having to depend on labor brokers such as Martin. Moxley said he has had to rely on Martin’s workforce to help him complete larger jobs for the price general contractors are willing to pay.

Moxley said the entire construction industry has turned a blind eye to businesses that cut corners.

“There are hundreds of Martins,” Moxley said.

Moxley said he wasn’t aware that Martin’s business methods may be afoul of the law.

“If I knew, I wouldn’t hire” him, Moxley said. “We ask if he’s legit, and he tells us he is.”

Businessman seeks justice

Burton won a few bids this year that let him bring back some of his old employees. He studies his books daily, seeking the cash flow to restore the 8 percent pay cut he imposed on employees in December 2010.

Business seems too fickle, Burton said, and as long as his competitors cut corners, he has no guarantee that his business will rebound.

In the evenings, Burton researches misclassification and how it plagues the construction industry.

At meetings of the N.C. Masonry Contractors Association, where he is a past president, he implores his colleagues to stop using labor brokers such as Martin. Over dinner with his closer associates, he tells them they are killing the business.

Last year, Burton began reaching out to state agencies that could investigate Martin. He tried to file complaints on behalf of a Martin employee at the state Department of Labor and the state Department of Revenue.

“No taxes, no Social Security match, no fed or state unemployment is being withheld,” says his Revenue Department complaint.

He wrote letters to members of Congress. A few sent polite responses; none offered assurances.

“It’s almost like no one sees this as their problem,” Burton said.

The government is not completely inactive, however. In July, an official from the Division of Employment Security contacted Burton – to tell him that his tax withholding would be the subject of an audit.

He passed.

Staff writer Chris Kudialis and news researchers Peggy Neal and Brooke Cain contributed to this report.

Tomorrow: A wreck changes everything.

Locke: 919-829-8927

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