From The Indiana Lawyer,
Workers on construction sites across Indiana can be found nailing plywall from atop scaffolds, scaling roofs or painting newly built homes. But what isn’t evident is whether those workers are part of a shady trend construction industry experts say is a serious concern — payroll tax fraud.
Certain contractors in the construction industry will misclassify workers, falsely listing them as 1099 workers or independent contractors in order to avoid federal and state employment laws. That in turn robs them of regular benefits that other employees receive, and experts say it also robs the state and federal government of hundreds of millions in tax dollars.
A bill in the Indiana General Assembly that would have tackled the growing issue missed its chance by a hair this legislative session, but its author promises to champion the cause again next year.
Spotting bad actors
Senate Bill 126, authored by Republican Sen. Mike Bohacek of Michiana Shores, would have held contractors on a higher tier accountable for their subcontractors’ actions by creating a task force intended to weed out “labor brokers” in the construction industry. Those subcontractors, he said, encourage laborers misclassified as independent contractors to not pay taxes.
The bill specified that general contractors for certain projects would be “jointly liable with any subcontractor or professional employer organization for penalties and unpaid taxes or deposits with a governmental entity resulting from failure to comply with any law, regulation, ordinance, or contract provision requiring licensing, bonding, insurance or self-insurance, or misclassification of an employee as an independent contractor.”
It also would have provided a procedure for the initiation of an investigation into tax fraud.
“It’s a growing issue. If we are really not enforcing laws on the books, what is the incentive for people not to do it?” Bohacek said.
The issue isn’t new — some subcontractors have long paid employees cash under the table as independent contractors to avoid complying with federal and state employment laws. By treating the workers as independent contractors, those in charge can avoid paying Social Security, payroll taxes, unemployment and workers compensation.
The model looks like this — a general contractor will hire out subcontractors for specific jobs such as plumbing, painting or carpentry, who in turn hire individuals considered to be “labor brokers.” Those brokers will then hire laborers to do the construction as “independent contractors,” who are paid without leaving money trails.
That practice is harmful to those in the construction industry who conduct their business honestly, said the Indiana/Kentucky/Ohio Regional Council of Carpenters, which represents tradespeople and contractors across the Midwest.
“While we represent 35,000 members across the three states, we also represent those who are less fortunate and not represented, who are basically abused in the construction industry,” said Todd Pancake, executive secretary-treasurer of the council.
“Not only do they not have the opportunity to possibly be paid a living wage, but no taxes are paid on those when they get paid. It affects us in two ways: One, it takes away from the work of our fair contractors, and two, it takes away from the working men and women who don’t have an opportunity to be represented fairly.”
Read the full story at Intentional misclassification of construction workers causing concern – The Indiana Lawyer