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Correction to This Article
ยท A Feb. 9 Metro article on a labor law proposal in Maryland contained an incomplete description of the Internal Revenue Service's scrutiny of FedEx Ground. The company states in its latest quarterly report to the Securities and Exchange Commission that the IRS withdrew a $319 million fine for misclassifying its workers as independent contractors. The article also incorrectly said that an estimated annual loss to Maryland of $22 million in unemployment insurance premiums was the result of companies hiring illegal workers. The lost premiums are the result of missclassification of workers in general, state officials say.
Labor Proposal Targets Builders
Low-Wage Workers' Treatment a Worry

By Lisa Rein
Washington Post Staff Writer
Monday, February 9, 2009

The workers building the office towers and homes around Washington are at the heart of a furious battle between Maryland's labor unions and contractors as the economy tightens the vise on the competitive construction industry.

Thousands of drywallers, painters, carpenters and other workers -- the backbone of the region's building industry -- are employed as "independent contractors." That means the boss is exempt from paying Social Security and Medicare taxes, unemployment insurance and workers' compensation premiums. Maryland Gov. Martin O'Malley (D) called the practice "shameful" this month and says the workers are employees who are deliberately misclassified, leaving them exploited and depriving the state treasury of tens of millions of dollars in unpaid payroll taxes.

The governor is calling on the General Assembly to make misclassifying illegal. But the construction industry says it is being unfairly targeted with regulations that threaten its already slim profits.

In the middle are low-wage workers, often caught between multiple layers of subcontractors and labor brokers that create confusion over who is responsible for their livelihood.

Under the state's definition, independent contractors are in business for themselves. They cannot unionize and are exempt from overtime and minimum-wage protections. If they are injured on the job, they pay their own bills if they have not paid their own workers' compensation premiums. They are hired to carry out specific tasks. Their work is closely supervised, they cannot take other jobs and the boss decides where, when and for long they work.

The men building Metropolitan Baptist Church's new sanctuary in Largo signed a time sheet every morning at 6:30 and worked six-day weeks for eight months. But when Miguel Ponce, 23, his brother Cristino, 21, and 31 other workers on their crew got their paychecks, no pay stub showed taxes had been withheld. And when the job ended last August, the young brothers from Mexico contend they were stiffed for 346 hours of pay, much of it overtime. They have filed a complaint with the federal Department of Labor.

The Ponces, who share a room in the basement of a house in Berwyn Heights, say the conditions of the job made them employees. But the Manassas broker who hired them said he considers them "pieceworkers," paid by the sheet of drywall they hung. "They're kind of independent," Ramon Alvarez said. Alvarez and an employee of C.R. Calderon Construction, the College Park subcontractor that hired him, said they are in litigation over the wages.

State officials say random state audits show that as many as 20 percent of Maryland's blue-collar workers are wrongly classified.

"This bill is about employers who cheat and cracking down on them," said Thomas E. Perez, the secretary of labor, licensing and regulation. He said the problem is undermining a century of basic labor protections.

Nine states have passed laws or regulations to crack down on the classification practice, which is also under scrutiny by the Internal Revenue Service. Among the targets of lawsuits and federal action is FedEx Ground, which was fined hundreds of millions of dollars in unpaid employment taxes after the IRS determined the company wrongly classified its drivers as independent contractors.

In Virginia, Rick Eppard of the United Brotherhood of Carpenters says the union is "educating" lawmakers about the practice and hoping the legislature will form a commission to study it. But lawmakers in the right-to-work state have not been enthusiastic about many labor priorities.

Unions in the District, Maryland and Virginia have a direct stake in the Maryland bill, not just because workers are vulnerable. Employers who pay workers as independent contractors can save 30 percent in payroll costs, experts say, undercutting unions that pay taxes and premiums in bidding competitions for construction jobs.

Representatives of the building industry say Maryland's bill, which would impose stiff penalties on contractors, landscapers and package-delivery companies that misclassify, is not needed and unnecessarily punitive.

"What we're talking about is such a small number of people, and [the state] has no empirical evidence to show anyone is doing this," said Michael Pappas, a construction lawyer representing Associated Builders and Contractors, a trade group. He said the legislation, by putting the onus on a business to prove that its workers are independent contractors and not employees, is stacked against the industry. "Mr. Perez has made no bones about his affinity for big labor."

The state's labor commissioner would enforce the law, a provision opponents say could subject companies that break it unknowingly to penalties that could put them out of business.

The industry, led by an association representing minority contractors, is lobbying to weaken a draft of the bill before the administration formally introduces it.

Thousands of companies hire independent contractors legitimately, from computer consultants to plumbers. But state officials say fraud is not hard to find in industries the bill would target, partly because so many illegal immigrants are willing to take low-wage jobs. Perez's agency estimates that hiring of illegal immigrants results annually in the loss of $22 million in unemployment insurance premiums alone -- enough to cover another of the governor's priorities, coverage for a growing number of part-time workers.

"Somebody's getting fat off of this while the state is cheated out of money," said Rod Easter, president of the Maryland Building Trades Council, which represents 38,000 union workers in Maryland and the District.

Perez said his agency has taken enforcement actions against several companies. But he acknowledged that current law has "no credible deterrent" to violations and contains "slap-on-the-wrist" penalties.

The bill as it is drafted would fine a company $5,000 for each worker it knowingly misclassified, and double for a second violation. A third could lead to debarment. Employers who make an honest mistake would pay $3,000. With more firms expected to pay into the state's workers' compensation fund, $1.7 million would pay for new inspectors to enforce the law.

Contractors, many of them minority owners of small businesses, say the penalties would threaten their existence. Many small companies hire one or two workers to hang drywall on a job rather than a crew, leaving the workers free to jump to other jobs as they become available, said Pless Jones, president of the Maryland Minority Contractors Association and a business owner.

"They're independent contractors, the way we see it," he said. "Some of these are start-up businesses. We want to make sure everybody can make a living as they had been." Jones and other contractors say an accidental violation of the law could put them out of business.

"Anytime you put in oversight just for the sake of oversight, in the long run somebody's going to pay," said Scott Harding, an electrical contractor in Rockville. His company employs about 50 electricians and pays their taxes and premiums, he says, but subcontracts work for other companies.

The Ponce brothers, who worked at construction jobs in Mexico City before they followed relatives to Maryland five years ago, heard from a friend that Alvarez hired Latinos for jobs around Washington. They took home about $700 a week to hang drywall for the 4,150-seat church off the Capital Beltway in Largo. "Sometimes he would say, 'I have only $500 this week,' " said Miguel, who went to night school to learn English until his money ran out. The brothers said Alvarez also deducted 10 percent of their weekly pay for "taxes," but the brothers do not recall filling out any tax forms.

By last August, there was no paycheck. Miguel was owed for 160 hours pay, Cristino 186, and some of their fellow workers as many as 250 hours, they said. The entire crew filed a complaint with the Labor Department, but the brothers said they have heard nothing yet.

"Right now there is very little work," Miguel Ponce said. "A day here, a day there."

Alvarez said Calderon Construction promised him $360,000 for the job, out of which he would pay the workers and himself. He said he received $132,000 and had to stop paying the crew. "He promised to the guys he's going to pay them," Alvarez said of Calderon. "I was paying them from my own pocket." He said the workers signed a form saying they agreed to pay their own taxes -- he is preparing tax forms, called 1099s, to distribute to the workers. He denied withholding 10 percent from the workers' weekly pay, saying they were "mistaken."

A project manager for Calderon, who said he did want to be identified because discussing the dispute could jeopardize his job, said Alvarez was "paid in full" and failed to pay his workers. "When we had proof some of these guys weren't getting paid, Carlos was very concerned," he said of the owner.

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