Tax cheats prey on immigrants in construction trade
Investigation finds as many as a third of construction workers have been wrongly classified as independent contractors instead of employees. Each year the practice costs taxpayers billions of dollars while state and federal governments are desperate for tax revenue.
The Sacramento Bee
Who is an independent contractor
Here’s the federal test:
• Each worker could come and go as he pleased, setting his own hours and schedule.
• Each worker owned and used his own tools and supplies and had enough of a line of credit with vendors to buy the necessary materials, such as HVAC equipment and siding.
• Each worker tackled the work as he saw fit, not heeding direction and correction from superiors.
• Each worker secured enough compensation to allow him to earn a living and cover the overhead that a self-employed person must handle.
For a full list of the factors the IRS and the Department of Labor use to judge whether a worker is an employee or an independent contractor, visit www.irs.gov and search for “independent contractor.”
The News & Observer
SAN FERNANDO, Calif. — Week after week, Alfredo Barreda carried a paycheck from his construction job to the bank, where he waited in line for a teller, then stuffed two wads of cash into the front pockets of his pants, he said.
The money in the left pocket went home, to his partner, Denise Alejandre, and their three children. The roll of bills in the right, he said, went back to his boss.
It wasn’t the life he’d imagined as a young man, when he hoped that wiring and plumbing work would lead him to the success his own parents had envisioned years ago when they brought him and his siblings across the Mexico-U. S. border.
Barreda, 35, works on federal contracting projects in Southern California. His path to the middle class has been stunted, he said, by the schemes that keep him short of being able to pay his bills.
Barreda is one of thousands of immigrants laboring in an industry rife with broken promises and informal agreements.
“There is nothing we can do,” Barreda said. “That’s not right. But it’s the only way we know.”
A nationwide McClatchy investigation found that in Southern states, where there’s a lack of unions and a supply of eager immigrants like Barreda, as many as a third of construction workers have been wrongly classified as independent contractors instead of employees.
The problem persists across the nation, and each year the practice costs taxpayers billions of dollars while state and federal governments are desperate for tax revenue.
But, as McClatchy found, misclassification breeds other schemes as company owners clamor for an advantage over competitors.
• Companies may dodge prevailing wages required by the Davis-Bacon Act, a 1930s-era law that mandates fair wages on federally backed projects.
• Workers are sometimes cheated on hours or overtime pay.
• They may be paid cash under the table, pushed into an underground economy.
• Companies refusing to provide tax forms that allowed workers to file tax returns.
• Bosses forcing workers to pay a fee to use protective gear such as hard hats and steel-toe boots.
• Workers forced to give some of their wages to company bosses.
• A workplace injury without any insurance to take care of it.
“You have certain contractors who find ways to game the system,” said David Kersh, the executive director of the Carpenters/Contractors Cooperation Committee in California, a labor-management group. “They’re cheating workers. They’re cheating taxpayers.”
In San Fernando, Barreda’s pay never reflected what he truly worked, he said. Anything more than $17 to $20 an hour had to be returned.
He patted his right pocket, miming the missing money. “All the time I say, ‘This money should be mine.’ ... It wants to be together.”
Barreda signed an affidavit as part of a complaint filed with the U.S. Department of Labor stating his boss forced his brothers and him to return portions of checks. If they didn’t agree to return the money, they wouldn’t work, he said.
His older brother, Abel Barreda, who described himself as foreman, signed a separate affidavit explaining that he collected the money from his brothers and other workers to give to his boss or to buy tools.
While they started off working illegally, Barreda and his two brothers have since become legal U.S. permanent residents.
Often, laborers affected by the schemes are, like the Barredas, foreign-born. Immigrants have swarmed to the United States over the past two decades seeking refuge and opportunity. Many found work in construction trades, riding building booms.
Slowly, they supplanted the American workers who made a life pouring concrete and shingling roofs.
By 2012, Hispanic workers accounted for nearly 20 percent of construction workers nationally, up from just 9.2 percent in 1990.
This is particularly true in California, where 40 percent of construction workers are immigrants, the highest rate in the country, according to the National Association of Home Builders’ use of census data from 2011.
Among the misclassified workers listed on records McClatchy analyzed, the majority had Hispanic surnames.
Amnesty law changes
The practice of misclassification dates back decades, but its prominence grew after the 1986 amnesty law signed by President Reagan.
The law granted legal status to thousands of people living here without papers, but it also made it harder for companies “to knowingly hire” immigrants who are in the U.S. illegally.
With the federal government cracking down, more employers have turned to misclassification as a way to keep an illegal labor force. They aren’t required to verify the immigration status of independent contractors.
“Employers realized one way to avoid this is not to be called an employee,” said Muzaffar Chishti, the director of the Migration Policy Institute’s office at the New York University School of Law. “The sanctions apply only if you directly employ someone.”
When Barreda got a carpentry job working on military bases, he thought things were beginning to change for his family and him.
For the first few years, Barreda said, he was paid primarily under the table, in cash. He worked for California Creations, owned by Daniel Wishard. It was Wishard, according to the brothers’ affidavits, who later adopted various payment methods to avoid paying prevailing wages, overtime and taxes.
Wishard forced them to return portions of their checks and paid for them to take out business licenses so that he could call them independent contractors, they said.
Wishard’s attorney, Brian Koegle, said he didn’t believe there was any truth to the allegations lodged by a “disgruntled employee.”
If the Labor Department asked about allegations of kickbacks, he said, they were easily explained. He said no money from any employee of California Creations came back to the company or Wishard himself.
“It’s not a kickback in the way you’re thinking about it,” Koegle said. “When overpayments are made, they get handled in a certain way.”
He acknowledged the brothers sometimes worked as California Creations employees and other times as independent contractors, but he said it was all in accordance with the law.
When asked about the brothers’ allegations that they were classified as independent contractors to avoid paying proper wages, Koegle said the brothers worked as subcontractors on a contract basis. The brothers even signed an agreement stipulating they were independent contractors, he said.
“They were subcontractors who bid on a project who were selected by bid to do the work on a contract basis,” he said.
But according to the Barreda brothers, they were never really independent.
Though Wishard supposedly subcontracted jobs to Barreda Lawn Care, the business Abel Barreda started, the work wasn’t lawn care. It was plumbing and electrical work on military houses and offices.
The brothers said they were told when to show up on the job and in what order to do their work. On a recent plumbing job at a San Pedro military neighborhood, they even wore California Creations shirts.
Wishard has done a lot of work for the federal government through his company, receiving more than $4 million in government contracts, most of which were with the Department of Defense, according to federal spending databases.
Alfredo Barreda saw the work as a steppingstone to running his own construction company one day, a path to a secure future and a viable stake in the American dream. He hoped he’d be able to buy a house in a safer neighborhood of San Fernando where he didn’t have to worry about his kids getting caught up in gang violence.
Matt Capece, a lawyer who works with the United Brotherhood of Carpenters and Joiners of America, said that immigrants, vulnerable and afraid, had enabled bosses who were willing to cut corners to get ahead.
The certified payroll documents that contractors are required to file every week for public-works projects often don’t show any wrongdoing, at least to the untrained eye.
Cheating contractors are smart, said labor compliance officers and contractor organizations. They avoid detection by misidentifying employee trades to pay lower rates and by shaving off hours to avoid paying workers their full week’s earnings.
Some go as far as accompanying employees to the bank to retrieve money from cashed checks.
“In California, the underground economy has always been there, but the cheaters have become more sophisticated,” said Bruce Wick, the risk-management director for the California Professional Association of Specialty Contractors. “Other states are where we were in 2003.”
“People can be fairly fraudulent and think, ‘I will never be caught,’ whereas people in California think, ‘I better put on a veneer of legitimacy and (have them) dig to find where I’m cheating,’ ” Wick said.
A new report on California by the Economic Roundtable for the United Brotherhood of Carpenters estimates that some 39,800 construction workers in the state were wrongly classified as independent contractors in 2011, a number that continues to grow.
This spring, Alfredo Barreda and his brothers signed the affidavits for the Carpenters/Contractors Cooperation Committee in California. In late July, the group sent the affidavits to the Department of Labor, asking it to investigate Wishard and California Creations.
On Aug. 25, a Department of Labor investigator interviewed Alfredo and Eduardo Barreda about how they were paid. The men drove to the DOL office from work, still dressed in their California Creations uniforms.
Alfredo Barreda is ready to move on, perhaps to a job in another state. There, he looks forward to walking into a bank carrying an honest paycheck, where he’ll put all his cash in a single pants pocket, bound for home.