Congress, state leaders pledge to tackle labor tax-law dodge

Key lawmakers in Washington have pledged to look further into a McClatchy report on companies with federal contracts that defied labor laws in order to avoid their tax obligations.

Democrats and Republicans expressed outrage about the investigative findings, including that as much as billions in taxpayer dollars were being squandered by companies on stimulus projects and other federal contracts by wrongly identifying their workers as independent contractors instead of as employees in order to undercut competitors and lower costs.

Congressional aides expect McClatchy’s multi-part series, called “Contract to Cheat,” to be the focus of hearings on Capitol Hill after the midterm elections. State leaders have vowed to investigate legislative and regulatory options to combat the practice on government contracts. And business and labor groups say they'll use the findings to call on their state and federal leaders to help root out bad actors who cheat honest employers out of jobs.

“This series should be a wakeup call for Washington,” said Sen. Sherrod Brown, D-Ohio, who has introduced legislation on misclassification that has been stuck in the Senate.

In the five-part series, McClatchy reported that the federal government looked the other way in the midst of rife cheating on federal contracts following the 2009 stimulus in the rush to resuscitate a economy on the brink of collapse.

Scofflaws across the country, from North Carolina to California, were able to save 20 percent or more by not paying state and federal taxes. They cheated competitors and exploited desperate workers, denying them unemployment benefits and often overtime and workers compensation.

“Misclassification of workers has plagued the building trades for years,” said Brown, who plans to reintroduce his legislation later this year. “The practice harms workers, puts legitimate businesses on an unequal playing field, and robs city, state and federal governments.”

Reporters from eight McClatchy newspapers and its Washington bureau, along with ProPublica, a nonprofit investigative news organization in New York, spent a year visiting federal construction sites, talking to hundreds of workers and company bosses.

Pervasive practice

The practice was so pervasive on federal contracts that billions in potential tax revenues were kept by construction firms and their workers. In Florida alone, the McClatchy analysis showed that nearly $400 million in tax revenue was lost. In North Carolina, nearly $500 million. And in Texas, roughly $1.2 billion.

“Clearly, there has been inadequate oversight of President Obama’s stimulus funding, with lucrative contracts given to tax cheats and the politically favored,” said Rep. Robert Pittenger, R-N.C., who sits on the House Financial Services Committee.

Sen. Bob Casey, D-Pa., who leads Senate subcommittees on employment and workplace safety as well as taxation and Internal Revenue Service oversight, said he hopes the McClatchy series will help bring more attention of the problem to the public and to Washington.

“More tools are needed to round up the bad actors who are gouging workers and taxpayers,” said Casey. He has introduced legislation that increases penalties against those who misclassify their workers.

McClatchy found that regulators at the top levels of the administration, including the Department of Labor and Department of Housing and Urban Development, failed to alert one another of red flags or to share key information that could stop the tax cheating.

This story was originally published September 12, 2014 at 10:38 PM with the headline "Congress, state leaders pledge to tackle labor tax-law dodge."