Original Title: Freelance Labor Costs Illinois $300 million
By Bob Tita
June 04, 2007
A year ago, Mike Volpentesta threw in the towel on his 15-year-old masonry contracting business. Despite a booming construction market in Chicago, Mr. Volpentesta, a career mason, was getting consistently underbid — by wide margins — on bricklaying jobs. He had no idea why.
"I started thinking, 'Am I that out of touch with what other guys are charging?' " says Mr. Volpentesta, 44. "I had one general contractor tell me, 'Mike, you should just stop bidding, because you just can't compete.' "
By the time he took the contractor's advice, Mr. Volpentesta learned how he'd been getting undercut: The winning bidders had shrunk their costs 30% or more by paying their workers as independent subcontractors, which allowed them to avoid payroll taxes, workers compensation and unemployment insurance. Their workers, mostly immigrant tradesmen, earned $10 to $15 per hour less than the $35 hourly union wage.
As Mr. Volpentesta found out, the practice of using off-payroll immigrant workers was taking Chicago's construction industry by storm, cutting many union, and some non-union, contractors out of building projects — and depriving the state of much-needed tax revenue. A recent study estimates the practice cost Illinois more than $350 million in taxes in 2005. The study, conducted at the University of Missouri, also estimated that 8.5% of all Illinois workers were misclassified as independent contractors that year, up 55% since 2001.
"It's caught on like wildfire," says Tom Villanova, president of the Chicago and Cook County Building Trades Council.
The practice also highlights another complication in the raging immigration debate: Many of the skilled tradesmen being treated as off-payroll contractors enter the country legally. Some come on tourist visas that let them stay through the warm-weather construction season. Others simply stay long after their visas expire, knowing they can make substantially more money in the United States and that tax and immigration authorities are unlikely to hunt them down.
SUPPLY AND DEMAND
And while rising health benefit costs have pushed businesses in many industries to shift workers from employee to contractor status, the trend has been most prevalent in the booming construction market, where demand for workers has outstripped supply, and the immigrant population has provided a steady flow of skilled labor.
"It's how many immigrants start out," says Robert Fital, who legally entered the United States from Poland in 1992 and worked for two years as an independent subcontractor. He says none of his employers paid taxes or insurance on him. "They didn't tell me anything. They just said I had to pay my own taxes."
Mr. Fital says he knew nothing of U.S. employment or tax law. His rudimentary English made it difficult to challenge his bosses or demand a conventional employment relationship. Eventually, he joined the International Union of Bricklayers and Allied Craftworkers, cutting back from the 60-plus-hour weeks he'd been working and commanding a better wage.
But many non-native workers are less interested in entering the legitimate workforce.
"If you're going to work for three months and make the equivalent of what you'd make in three years (in another country), you're going to keep your mouth shut," says Cliff Horn, president of A. Horn Inc., a union contractor in Barrington who's been shifting his focus to publicly funded projects and high-end construction jobs to avoid competitors who use independent workers.
Some estimates say as much as 50% of income earned by independent contractors nationwide is not reported to the IRS. The Missouri study, which looked at random tax-audit records, estimated that misclassified contract workers in Illinois deprived the state of $248 million in state income taxes and $54 million in unemployment premiums in 2005 and failed to pay as much as $96 million in work comp premiums.
The state may recover some of that money if Gov. Rod Blagojevich signs a bill passed by the General Assembly that would tighten the rules that distinguish employees from contractors. Generally, workers who are told what time to show up, given specific instructions at work and who use the employer's equipment would be considered employees, subject to tax and insurance requirements. Fines for business owners who break the law would be as high as $2,500 per worker per day.
Unions and union contractors are also using the courts to pursue contractors they suspect of paying full-time workers as contractors.
Late last month, the Bricklayers and Allied Craftworkers union and a pair of union masonry contractors filed a federal lawsuit against Chicago-based Jerry Ryce Builders Inc., accusing the company of fraud and racketeering in obtaining jobs last year in Evanston and Chicago. The complaint, filed by A. L. L. Masonry Construction Co. of Chicago and U.S. Masonry Inc. of Glen Ellyn, says Ryce's use of low-cost, illegal labor constituted an unfair advantage over other bidders.
The suit claims $471,200 in lost profits and damages. Calls to Ryce were not returned.
Mr. Volpentesta, who these days monitors job sites for a masonry labor and management council, says years of competing unsuccessfully against Ryce helped convince him to abandon his own contracting business.
"That son of a gun crushed me on a lot of projects," he says.
©2007 by Crain Communications Inc.