Federal grants aim to fight tax cheats

The U.S. Department of Labor on Monday awarded $10.2 million to nearly two dozen states to beef up enforcement of a labor scheme that companies employ to evade their tax obligations.

The announcement of the first-of-their-kind grants comes one week after McClatchy’s five-part series that uncovered the federal government’s failure to stop companies that wrongly classify their workers as independent contractors instead of employees on federal contracts.

Labor Secretary Tom Perez said the grants, which range from $28,000 to $1.3 million, will help states identify and stop so-called worker misclassification and protect state unemployment insurance benefits.

“This is one of many actions the department is taking to help level the playing field for employers while ensuring workers receive appropriate rights and protections,” Perez said in a statement.

McClatchy, parent company of the News & Observer, reported that the federal government allowed companies on federal contracts to get away with not paying state and federal taxes by wrongly classifying workers as independent contractors.

Honest business owners were unable to compete with the bad actors, who could save more than 20 percent in labor costs. Their workers were left without labor protections and often were denied overtime and workers’ compensation.

State and federal lawmakers have vowed to exhaust legislative and regulatory avenues to confront the practice that costs taxpayers up to billions of dollars annually.

“This is another example of corporate greed ruling over the rights of workers, and it’s an insult to all Americans who work hard, pay their taxes and play by the rules,” U.S. Sen. Jon Tester, D-Mont., chairman of a government affairs subcommittee on the efficiency of federal programs, said in a statement Friday regarding McClatchy’s investigation. “False classification of workers robs them of their wages and worker protections. I will not stand for that.”

The Labor Department grants do not specify whether they’re for enforcement of private or public contracts, and officials did not return follow-up requests on whether and how these funds could be used on federal contracts.

While some states have existing programs designed to stop worker misclassification, this is the first year the U.S. Labor Department has awarded grants targeting the practice, federal officials said.

Texas will receive nearly $1.3 million – one of four states awarded an additional “high-performance bonus,” because of ongoing work in fighting misclassification, officials said.

Other states received much less; Florida was granted $31,792 despite high levels of misclassification in the state.

An estimated 37 percent out of 805,000 construction workers in Texas are misclassified, according to McClatchy’s analysis. In Florida, nearly 16 percent are misclassified.

The practice was so pervasive on federal contracts in Texas that roughly $1.2 billion in tax revenue was lost, according to McClatchy’s analysis. In Florida, the figure was nearly $400 million.

Not every state received Labor Department money that could have used it. North Carolina didn’t receive a grant despite McClatchy’s analysis showing that more than a third of construction workers are misclassified.

Dale Folwell, the state’s assistant secretary of employment security, said North Carolina did not apply for the grant. Folwell said federal grants carry tight deadlines and often obligate states to use vendors or programs that aren’t compatible with technology already being used.

Proponents of greater enforcement of misclassification saw the grants as a good sign of needed collaboration between states, federal federal government and different agencies.

“In order to deal with misclassification, you have to work across governments, the tax side with the labor enforcement side, and this seems like a step towards that,” said David Madland, the managing director of economic policy at the Center for American Progress, a left-leaning think tank in Washington.

This story was originally published September 16, 2014 at 6:13 AM.