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IBEW Local 520 Goes Undercover to Uncover Texas’ Underground Economy

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The misclassification of employees as independent contractors plagues state and local governments, workers, and management nationwide.  Underpayment coupled with denied benefits means a diminished tax pool and increased strain on government programs.  In the construction industry, this misclassification is prevalent and the culture of subcontracting provides cover for bad bosses. A lack of oversight denies workers employee status and enables exploitation (especially of undocumented workers).

Recently, the International Brotherhood of Electrical Workers (IBEW) Local 520 in Austin, Texas sent workers onto construction sites to perform undercover investigations.  The results support what we already know about misclassification’s prevalence, and may even signal a more grave situation than expected.  Labor Notes published the findings of the union’s investigation:

“The workers sometimes wouldn’t even get paid that week. They were scared to report the violations to anyone. They feared their boss and the government due to deportation,” said Philip Lawhon, assistant business manager/organizer for Electrical Workers (IBEW) Local 520.
“One of our members said that it reminded him of working in Mexico. He said, ‘I came to America to get away from these types of issues.’”

The Austin-based Workers Defense Project released their report, “Build a Better Texas” earlier this year and found that 40 percent of construction workers in the Lone Star State were misclassified.  The findings of Local 520’s investigation verify the Worker’s Defense Project’s claims.  ”Build a Better Texas” claimed 81 percent of Texas construction workers are Latino and that 73 percent are foreign born.  The Local 520’s findings match these results.  Wagner explained how they got their workers onto these work sites.

Twelve high-rise projects, 17 to 50 stories, in and around downtown Austin are in some stage of construction, from planning to near completion. My organizers found that, of the eight that have started construction, six are using electrical contractors that misclassify their employees as independent contractors.

Four of them are using the same contractor, Power Design Inc., from Florida. Managers at Power Design, we found, had attempted to insulate themselves from charges of payroll fraud by subcontracting out most of the labor to still other contractors, ESP Electric and ES&R, both owned by brothers Rigar and Alex Espinosa.

We got three of our members hired on with these two companies during the summer of 2012, all of them Mexican citizens fluent in Spanish.

These members found that “90 percent of the installers were undocumented immigrant workers,” Lawhon said. “These workers’ skills were very limited. The workers were trained to do basically one task and that was predominantly all they did.”

The Local 520 investigation found that many subcontractors deflect blame from higher ups:

As far as we can tell, ESP and ES&R exist only to provide manpower to other unscrupulous electrical contractors. We can find no records of either company contracting with any general contractors or pulling any electrical construction permits.

ESP and ES&R both pay their workers as independent contractors, anywhere from $8 to $14 an hour, with no deductions, no unemployment, no workers’ comp, and no overtime pay.

Workers are hired by word of mouth and paid by check. Many frankly prefer being paid under the table—but they get upset at the working conditions and getting shorted on their pay, getting paid late, or not getting paid at all.

The workers did not even receive 1099 forms at the end of the year.

Perhaps the most forgotten victims in the misclassification war are the honest companies attempting to compete against companies who misclassify as a business model.  When doing the right thing means being unfairly underbid, the system is undermined:

Companies that operate illegally by not paying payroll taxes, unemployment insurance taxes, and overtime compensation are able to underbid legitimate contractors by 15 to 25 percent, according to Michael White, Vice President for Government Affairs for the Texas Contractors Association.
Responsible businesses are also burdened by increased unemployment insurance tax rates, caused by the recession, when others fail to make their required payments.

Misclassified employees, cheated out of pay, also have less money to purchase goods and services, so the state loses out on sales tax revenue—creating another burden on an already cash-strapped state. Texas has no income tax.

Lost unemployment taxes due to this kind of payroll fraud total around $54.5 million a year—meaning that much less money for unemployment benefits for those who need them.

With help from labor organizations like the Workers Defense Project, there is a bipartisan push to help honest companies compete against those abusing the system.  But as we know too well, government sometimes moves quite slow while workers wait, unprotected.  More direct action, like that taken by Local 520, will be needed to spur politicians to act, to end the vicious misclassification cycle.


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