Labor laws aren’t supposed to be this flexible.
So many companies in the construction industry are misclassifying their workers – paying them less and treating them as independent contractors – that competitors who follow the rules say they are getting shut out of Rhode Island contracts.
Gilbane Building Co., one of the state’s largest construction managers, often won’t bother to submit a bid if it sees a bidders list dotted with names of companies it knows to operate this way, according to John Sinnott, a vice president. The same goes for a construction walk-through, based on a scan of the crowd.
“We play by the rules,” Sinnott said. “We hire legitimate contractors who hire legitimate subcontractors, who hire legitimate tradespeople.
“We make that investment on insurances, safety, all the right things,” he continued. “When we go up against these people … it gives them an unfair advantage. A lot of the clients don’t realize what they’re paying for.”
The issue, he says, isn’t union versus nonunion labor. Gilbane uses both. The problem is the competitive disadvantage for companies that provide their employees with unemployment insurance and workers’ compensation insurance, and pay the prevailing labor wage, which is required on any project in the Ocean State valued at more than $1,000 that receives public funds.
The state in the past four years has put more emphasis on investigating and enforcing its laws relating to labor practices, including misclassification of employees, say industry and government sources. The number of settlements with violators has increased each year since 2015, climbing to 27 in 2018.
But many company and labor representatives say more enforcement is needed – including potentially holding building owners and property owners accountable for the practices that take place on building or work sites.
The problem is particularly acute in a few industries – landscaping, construction and trucking, according to state and industry officials.
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PUBLIC CONTRACTS: Jose Marcano, right, owner and president of Jomar Painting, works with members of his crew, Wilmer Escorcia, foreground, and Raphael Perdomo, to paint the 500-bed Brookside Apartments Complex at the University of Rhode Island. With state minority business enterprise certification, Marcano now focuses only on public contracts after losing out too often on private contracts to low bidders who don’t follow state labor laws.
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LOSING OUT
Jose Marcano, owner and president of Warwick-based Jomar Painting LLC, a state-certified, minority business enterprise, says he’s lost jobs to competitors who don’t follow the state labor laws. In fact, Marcano says he’s lost enough contracts to low bids submitted by companies that he’s stopped trying for private work.
“Some [general contractors], they hire for the low price, the low bidder,” he added. “They hire subcontractors that provide the low price. But when you see the low price, that’s a red flag. They miss a lot of [requirements, such as] having insurance or workers’ compensation.”
Marcano can afford for now to concentrate on public contracts, because he has state MBE certification and there is enough work to keep his 10-person crew busy full time, rotating among the projects. But more work-site inspections are needed, he said, particularly on weekends or at night, when he said many of the misclassified workers are on jobs.
“The state has to enforce this. Follow up wherever they go. Ask how long they’ve worked for the company. And if they’re paid every week,” Marcano said.
Insurers of companies often do their own investigation work.
The Beacon Mutual Insurance Co. has five auditors on staff and also hires an external auditor, and routinely checks payrolls of its insured clients to make sure they aren’t misclassifying employees.
Brian J. Spero, CEO and president of Warwick-based Beacon Mutual, estimates that annually the company audits three-quarters of its clients.
It has 60% of the workers’ compensation market for Rhode Island, he said, spread among 12,000 policyholders.
Misclassification financially hurts the company, because it loses the premiums that aren’t being paid and also pays benefits when a company it insures has a worker who is misclassified and ends up hurt.
“Many employers use independent contractors incorrectly to specifically avoid their obligations for state taxes and workers’ compensation insurance,” Spero said. “Those two issues go hand in hand. The amount you pay for payroll taxes and for workers’ compensation are directly based on the amount of employee payroll. The issue here is not a lack of education. The real issue here is the intentional misclassification.”
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TOP PRIORITY: Director Scott R. Jensen said identifying workplace fraud is one of the top priorities for the R.I. Department of Labor and Training.
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‘JUST SETTLE, MOVE ON’
Identifying workplace fraud is one of the top priorities for the R.I. Department of Labor and Training, according to Scott R. Jensen, the department director.
Misclassification, one of its forms, is treating an employee like a contractor, he said. “An employee, in legal terminology, has a lot of protections and benefits that go along with it that independent contractors don’t have.” When an employer misclassifies, he said, “You’re able to get around a lot of labor protections that have been put in place for the last 100 years.”
Specifically, companies can avoid paying state or federal taxes by paying people in cash, or “under the table.” They avoid providing workers’ compensation coverage, which protects employees who are injured on the job, and which is required of all companies with one or more employees. They can pay less than the prevailing wage for a job and violate other labor laws that are designed to protect workers.
Since 2015, a task force of six state agencies, including DLT and the R.I. Division of Taxation, has coordinated efforts to better enforce labor laws.
In annual reports, DLT documented some of the recorded offenses:
• In May 2018, JS Interior Construction Inc., of Levittown, Pa., admitted to misclassifying 27 employees as independent contractors, for work on The Commons at Providence Station, a residential apartment building. The company later admitted to misclassifying another four workers on the same project.
• In May 2018, Viga Construction Co., of Alexandria, Va., admitted it misclassified 17 employees as independent contractors while working on the Sonesta ES Suites Providence Airport hotel in Warwick.
• In September 2018, AD Contracting Services Corp., of Methuen, Mass., admitted it misclassified 27 workers who labored on the second phase of the Hope Artiste Village Lofts in Pawtucket.
• In September 2017, the state secured nearly $1 million in back pay for 200 workers who were misclassified by two companies, along with $1.3 million in civil penalties. Valet Connection Inc. had required its drivers to contribute tip money to an accident fund overseen by the company, according to the state summary. An investigation found 167 workers were improperly classified as contractors for two years.
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ROUTINE CHECK: Brian J. Spero, CEO and president of The Beacon Mutual Insurance Co. in Warwick, said his company has five auditors on staff and routinely checks payrolls of clients to make sure they aren’t misclassifying employees.
/ PBN PHOTO/MICHAEL SALERNO[/caption]
A separate investigation into C&D Industrial LLC Inc. found the Central Falls company underpaid laborers on seven public building projects. The company admitted it had purposefully underpaid 35 people, paying $729,377 in back pay and an identical amount in a civil penalty.
Alexander Galeas, president of Viga Construction, defended his company’s reputation in a phone interview with Providence Business News.
He hired a painting company as a subcontractor on the hotel but said he didn’t treat them as employees or tell them how to perform the job. He thinks Rhode Island treated him unfairly by putting a stop-work order on the project, which forced him to comply to get his project completed for the general contractor.
“You just want to get rid of all the headaches, and dealing with the state,” he said, explaining why he settled. “I didn’t want to fight any uphill battle in terms of litigation. My insurance guy said: Just settle, move on.”
Galeas said he carries insurance and workers’ compensation. “I’m legitimate. If I had more time, I could have fought a little more, but I was up against the wall trying to finish that project. I’ll tell you this much, I’m never going back to Providence or Rhode Island to do any work.”
LOST REVENUE
The biggest problem the state encounters, according to Jensen, is when unscrupulous businesses use independent contractors to cheat their competitors. That effectively drives up the cost of workers’ compensation insurance for companies that comply with the state law requiring it.
The state task force isn’t swooping in on companies that inadvertently make a mistake in misclassification. Its enforcement is targeting those who purposefully are treating employees as contractors, Jensen said. And the state isn’t targeting “gig” employment, where the contractor controls their work hours.
The difference between a contractor and an employee can be defined in a few ways, but generally relates to how much control is exerted by the company over the worker.
If they use company equipment, clothing and materials, company-provided trucks or cars, and report to work within specific, set time frames, they in all likelihood are employees, not contractors.
“When you are an independent contractor, you are truly independent,” Jensen said. “You work for a lot of other people. For example, Lyft and Uber [drivers], they don’t have to go to work.”
Construction work, landscaping and trucking are among the industries that are a state focus because the hours and work conditions are often enforced by the company, Jensen said. In some cases, the workers only find out they’re not employees when they’re fired and file for state unemployment benefits.
The state has taken a more aggressive stance in investigating anonymous tips about misclassification – it operates a hotline – and it will send its employees to large work sites if it has questions about labor practices.
‘There is more of an awareness … the state is out there looking for [violations].’
JOSEPH DEGNAN, DLT assistant director
“We go out and investigate,” said Joseph Degnan, an assistant director at the DLT who oversees workforce regulation and safety. “There is more of an awareness in the state that the state is out there looking for employee misclassification.”
In response to a public records request for all settlements reached since 2015, the DLT produced 61 cases, including 40 that reached settlements in the past 18 months.
One company reached an agreement over a prevailing-wage law violation in 2015, followed by eight in 2016 for misclassification of employees and 12 in 2017.
The number of enforcement agreements jumped to 27 in 2018 and reached 13 as of the end of June 2019.
While many of the companies settling with the state are in construction, other agreements were signed by restaurant and small-business owners.
The cumulative impact of employers skirting the law has meant the loss of hundreds of thousands of dollars in state tax revenue in the past two years alone.
In 2018, the most recent year for which statistics were available, the state’s Division of Taxation found that 321 Rhode Island employees had been improperly classified as contractors, resulting in $2.8 million in unreported wages. The state recouped $125,190 in lost taxes.
The year prior, the state found 560 employees were misclassified, resulting in $6.2 million in unreported wages. That year, the state assessed $307,177 in taxes against the companies.
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BUSINESS MODEL: International Union of Painters and Allied Trades representative Justin Kelley leads a protest during a worker-safety rally outside the Hope Artiste Village in Pawtucket last year following a workplace accident that injured three workers. He said worker misclassification has become a business model for “a large portion” of the construction industry.
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IMMIGRANTS TARGETED
Labor representatives also have taken a more active role in bringing public attention to the issue.
A group of 100 construction workers and supporters picketed outside the Hope Artiste Village this past spring, calling on elected officials to withhold tax incentives for developments that had work completed by companies violating labor laws.
The second phase of the Hope Artiste mill, which will feature renovated apartments, was the subject of both a serious injury to a worker, when a floor partially collapsed, and a DLT investigation over the labor practices of a subcontractor.
In October 2018, AD Contracting reached a settlement in which it admitted it misclassified 27 workers, according to DLT records. It paid $40,500 in fines, half of which went to the state, Degnan said. The company had workers’ compensation insurance for the injured employees.
Justin Kelley, a union representative for the International Union of Painters and Allied Trades, said misclassification has become a business model “for a large portion” of the construction industry. The fines are too low and written off by some companies as a cost of doing business, he says.
The problem is getting worse with the increase in construction activity, he added.
“It is creating a vicious cycle that’s a race to the bottom,” Kelley said. “There are a lot of systemic problems at work here, but the biggest victim is always the worker who is misclassified.”
And often, the worker who is most often victimized is an immigrant. For a variety of reasons, construction workers who cannot speak fluent English, or who may not have documentation to work in the United States, are vulnerable to being exploited by companies that hire them for jobs.
This can often lead to unsafe practices.
When a worker is mislabeled as an independent contractor, he or she assumes the burden for taxes.
“They’re given a 1099 [form]. They’re expected to pay the taxes for the job,” Kelley said. “Now the company has no payroll costs, no administrative burden related to that. They shed their liability for workers’ compensation. That further lowers their cost of doing business.”
The practice also leads to downward pressure on wages, he said. The worker who is an independent contractor may make $12 to $15 an hour for skilled labor, working alongside an employee with benefits making more than $50 an hour for the same job.
“It’s creating a situation where honest businesses can’t compete,” Kelley said.
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LOST JOBS: Jose Marcano, foreground, owner and president of Jomar Painting, and Raphael Perdomo work on the 500-bed Brookside Apartments Complex at the University of Rhode Island. Marcano said he’s lost jobs to competitors who don’t follow the state labor laws.
/ PBN PHOTO/MICHAEL SALERNO[/caption]
Fuerza Laboral, a nonprofit based in Central Falls, is an advocacy and policy group that intervenes on behalf of workers in a variety of industries, including by contacting the state DLT or providing attorneys.
Raul Figueroa, a community organizer for the nonprofit, said often the immigrants it works with don’t understand their rights or state labor law. Fuerza often receives misclassification or discrimination complaints months, sometimes years, after an incident.
Exploitation often starts out as what the worker perceives as an opportunity, Figueroa said.
“When there is a group of workers working for a company, sometimes the developer or the general contractors will say to one of the workers: ‘I like the way you work. I like the way you do things. I don’t like the person you work for so much. Why don’t we take the work away from them?’ “
The worker is told he will be in charge, and to assemble his own team. They see it as an opportunity to make a name for themselves, Figueroa said. Oftentimes, there is no paper contract, only an oral agreement.
“They perform the work and at the end the developer usually finds something wrong with the work, even if there’s nothing wrong,” he said.
If the developer or general contractor doesn’t pay the crew, there may not be anything in writing to document what was promised.
Fuerza is now working on a case that dates to 2016. Workers in the carpentry trade are especially vulnerable, he said. It’s happening on commercial projects, particularly at large mills undergoing renovation, he added.
Sinnott, of Gilbane, said drywall subcontractors who use misclassified workers have been known to pay them by the number of sheets installed – rather than by the hour, as is the norm.
Beyond stepped-up enforcement, labor activists would like to see greater accountability for the project owners on whose sites the labor violations are taking place.
The penalties need to be increased to make them meaningful. And criminal charges should be introduced, Kelley said. “From the building-trades perspective, we intend to be working on this next year,” he added.
Developers, building owners and general contractors know the practices of the people they hire, argues Kelley. They know they are hiring people as contractors rather than employees. “They are not stupid people. They are seeking to maximize their profits,” he said.
Gilbane has a screening process for people to get on their bid list, Sinnott said. The company makes sure everyone is fully licensed and has the proper insurances for workers. The company checks their safety history, he said.
Depending on the trade, the benefit to companies who don’t pay taxes or carry insurance on their workers can vary from 10-30%, Sinnott estimated.
“It’s substantial,” he said. “You get a lot of people who are operating by the seat of their pants. That’s what we compete against.”
The state should require some proof or evidence that projects that receive public funds are using the prevailing wage for subcontractors, he said.
Sinnott, who oversees projects in the $10,000 to $5 million range, has employees who review every project before a bid is put together. “We see who the competition is,” he said. Sometimes they go to the pre-bid conference or walk.
“They’ll come back and say, ‘We’re wasting our time, so-and-so is on the bid list,’ ” he said. “We won’t waste our time putting a bid together.”
Mary MacDonald is a PBN staff writer. Contact her at Macdonald@PBN.com.
