Battling a Damaging Workplace Trend

One of the most pervasive and damaging trends we are seeing in the 21st-century workplace is the deliberate misclassification of workers by employers looking to shift responsibility and cut costs.

Two judgments announced this week in Utah and Arizona demonstrate our commitment to cracking down on this practice, whereby companies claim that their workers are not employees but independent contractors.

The defendants (operating collectively as CSG Workforce Partners; Universal Contracting, LLC; and Arizona Tract/Arizona CLA) required their construction workers to become "member/owners" of limited liability companies, stripping them of legal rights that come with employee status. One day the construction workers were building houses in Utah and Arizona as employees, then the next day performing the same work, on the very same job sites and for the same companies, without the protection of federal and state wage and safety laws. The companies, in turn, avoided paying hundreds of thousands of dollars in payroll taxes.

The state of Utah was a helpful partner in the Wage and Hour Division's investigation of these defendants, providing information from the state's Worker Classification Coordinated Enforcement Council, an entity created by the state legislature to combat misclassification. The state ultimately outlawed the defendants' business model by requiring workers compensation and unemployment insurance for members of LLCs. In response, the companies packed up, headed to Arizona, and set up shop under a new name, but with the same scheme.

But employers can't just run to another state or change their name. When we find business models that violate the law, we will hold them accountable no matter where they go, so we opened an investigation of the so-called new company in Arizona. Ultimately, the division recovered $600,000 in back wages and damages for these workers, penalizing the employers an additional $100,000.

Misclassification is a serious problem in construction as well as other industries, and it is exacerbated by increasingly fissured employment structures where work is contracted and subcontracted away from the core company. Misclassification means workers are denied not just minimum wage and overtime but other social safety net protections like workers compensation and unemployment insurance. Employers' portions of payroll taxes also go unpaid in these situations, straining already-stressed programs like Social Security and Medicare. Misclassification cheats every taxpayer, and it undermines employers who play by the rules.

We are taking a vigorous approach to enforcement, one that involves strong partnerships with the IRS and 20 states. Success in this space requires information sharing, joint compliance assistance and coordinated enforcement. We depend also on tips and referrals from companies that are being undercut by their competitors' violations.

The Utah and Arizona judgments send a strong, clear message: Employers can't hide behind deceptive legal partnerships to cut corners and save money on the backs of their employees. It's our hope that this and other enforcement actions will serve as a credible deterrent that influences behavior throughout the economy. Especially in the fissured workplace, we will continue to be vigilant about protecting workers, taxpayers and law-abiding employers.