States, IRS to Join Probe of Home-Builder Pay Practices
By ROBBIE WHELAN
Seven states and the Internal Revenue Service plan to join the Department of Labor in a broad review of the hiring and pay practices of home builders and other companies the government says routinely misclassify workers as independent contractors, rather than employees.
Labor Secretary Hilda L. Solis, Internal Revenue Service Commissioner Douglas Shulman and top labor officials from seven states will agree Monday to coordinate enforcement efforts and share information about companies found to have violated labor laws, including denying workers minimum wages, overtime pay and benefits, according to an announcement Friday by the Labor Department.
Workers build a home in a Pulte development in Las Vegas in July.
The IRS is interested in the issue because employers don't pay payroll taxes on workers classified as independent contractors. A Government Accountability Office report from 2009 found that the misclassification of workers cost the federal government $2.72 billion in 2006. A Labor Department report in 2000 estimated that up to 30% of employers misclassify workers.
In August, the Labor Department sent letters to large home builders including Lennar Corp., KB Home, D.R. Horton Inc., Pulte Group Inc. and NVR Inc., seeking pay and employment records, according to people familiar with the matter and a copy of one of the letters reviewed by The Wall Street Journal. The letter also asked for names of all contractors hired in the past year. The letter didn't allege any specific violations of law.
A Pulte spokesman said the company received the letter, and was still reviewing it. The other builders declined to comment.
The Labor Department, in an emailed statement, said it was looking at industries in addition to home building, including hospitality, janitorial services, agriculture, day care, health care and restaurants.
"We are actively looking at those industries that employ the most vulnerable workers and that engage in business practices—such as misclassifying employees as independent contractors—that result in violations of minimum wage and overtime laws," a spokeswoman said.
Builder advocates say the probe represents another example of "regulatory intrusion" by the Obama administration and that the push for increased enforcement couldn't come at a worse time for the hobbled residential construction industry.
Home builders were on pace in July to sell 298,000 new homes in 2011, which would be the lowest level of new home sales ever recorded. During the housing boom, builders were selling more than 1.2 million homes per year. Few publicly traded builders are profitable, and most of them have laid off hundreds of workers.
"You've got an industry that's almost singularly responsible for keeping our economy in the doldrums. To pick this time to do these types of investigations, it's counterproductive to the health of the economy," said Jerry Howard, president of the National Association of Home Builders, a trade group.
The proper classification for a worker depends on factors including how much control or direction an employer wields over the workers. Employers aren't required to withhold income taxes or pay Social Security or Medicare taxes for independent contractors. Meanwhile, independent contractors aren't covered by many labor protections, including minimum wage and overtime laws, and unemployment or workers' compensation insurance.
Federal and state regulators say worker misclassification is particularly common in residential construction. Most large home builders in the U.S. typically don't keep many laborers on their books and do little actual home construction. Instead, they entrust much of the construction to carpenters, plumbers, roofers, electricians and others employed by contractors. This reduces the companies' costs and exposure to potential violations of labor laws.
Allegations of worker misclassification in the construction industry generally come in two forms: that builders misclassify laborers they hire directly as independent contractors, or they knowingly hire subcontractors who misclassify workers. The Labor Department's efforts focus at least in part on holding large builders accountable for classification violations by their subcontractors, according to person familiar with the matter.
The Labor Department is stepping up enforcement due in part to complaints from construction companies that keep laborers on their books as employees and say they can't compete against other companies that classify workers as independent contractors.
"In industries where there is competitive bidding, the honest contractors get nailed twice. Their rates of worker's comp premiums are higher because the other guys aren't paying, and they're losing jobs," said Carl Hammersburg, compliance chief for the Washington State Department of Labor and Industries, who attend Monday's meeting. "Now things are so cut-throat that every single job matters. If they lose a bid to someone who isn't paying worker's comp, isn't paying unemployment insurance, then they can go out of business."
The Laborer's International Union of North America has for several years protested Pulte's hiring practices and sought to unionize the builder's subcontractors.
One of the most high-profile disputes about worker misclassification is a continuing battle between the International Brotherhood of Teamsters and FedEx Corp. The union argues drivers for the company's FedEx Ground operation are illegally classified as independent contractors and thus ineligible to be organized, unlike drivers at rival United Parcel Service Inc. who belong to the union.
The misclassification issue has taken a higher profile in the past few years as cash-strapped states have focused on ways to capture more revenue and prevent employers from illegally failing to pay taxes on workers.
"In the last three or four years, the issue has taken off because of the economic downturn and the state budget crisis," said Cathy Ruckelshaus, legal co-director at the National Employment Law Project, a nonprofit, nonpartisan group that works on low-wage worker issues. "It's a huge revenue drain."
—Kris Maher and Melanie Trottman contributed to this article.
