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Article / Help Fight Payroll Fraud

Help Fight Payroll Fraud.

The Problem

Many contractors who rely on an immigrant labor force utilize so-called labor brokers to avoid responsibility for unlawful or questionable employment practices. Although construction workers are directly employed and paid by the labor broker, the contractor usually maintains authority to hire, supervise, discipline and fire them. The contractor pays the labor broker a fee - typically 3% to 15% of total payroll - for supplying the workers.

In many cases, the labor broker is simply an individual with little or no construction experience or skills himself, and he performs no work at the job site. He is simply a man with a list of names of ready and willing workers. He usually takes care of soliciting workers, transporting them to the job site, and securing their lodging accommodations.

What makes the use of labor brokers attractive is that, in most cases, contractors can secure workers more cheaply through a labor broker than it would cost to hire them directly. How, then, is a labor broker able to make a profit? Typically, labor brokers curtail their labor costs by systematically violating employment and payroll laws, or by undertaking other unethical cost-saving measures. (Riley, Michael. "Labor Brokers Cut Costs, Corners." The Denver Post, Feb. 16, 2003.)

Here are a few examples of abuses that have been reported:

  • Treating workers like independent contractors (instead of employees) to avoid having to make tax withholdings or paying into the unemployment insurance system
  • Paying workers in cash
  • Denying federally required overtime compensation to workers who work more than 40 hours in a work week
  • Paying workers less than the federal minimum wage
  • Verbal abuse, including racial epithets, directed at workers by supervisors
  • Deplorable living conditions for workers
  • Use of foreign workers through the H2B visa program during a period of high unemployment in the United States
  • Increased risk of heat stress for workers due to a lack of drinking water
Please read news articles about specific documented situations involving some of these schemes and practices.

Labor brokers go by various names, including labor contractors, job contractors, employee leasing companies, second-tiered subcontractors, sub-subcontractors, et al. But the term that is gaining the most popularity throughout the industry is professional employer organization (PEO), probably because it connotes integrity and legitimacy.

Regardless of the nomenclature used, all of these companies serve the same purpose. Small- and medium-sized businesses of all kinds outsource to labor brokers to recruit workers. But the principal advantage of using a labor broker is that, for most purposes, it voluntarily assumes legal responsibility as the employer of record. Thus, the client can ostensibly shift liability for everything from administering the payroll and paying employment-related taxes, to providing health benefits and securing workers' compensation coverage. (But see, "Using Labor Brokers: The Legal Issues." AWCI's Construction Dimensions, Aug. 2004 - Vol. 33 Issue 2. This article addresses the common misconception that employer liability can easily be shifted from contractor-client to labor broker, and explains that these arrangements may expose contractor-clients to unexpected liability.)

The National Association of Professional Employer Organizations estimates that "the PEO industry grew a very robust $10 billion to $81 billion in gross revenues in 2010. (The industry defines gross revenues as the total of its clients' payrolls and the fees PEOs charge them for taking on their human-resource activities.)" About 700 PEOs covering 2 to 3 million workers are operating in 50 states.

The use of labor brokers has become especially prevalent in the construction industry. Many construction contractors who rely on an immigrant labor force utilize labor brokers to avoid responsibility for unlawful or questionable employment practices. Although construction workers are directly employed and paid by the labor broker, the contractor usually maintains authority to hire, supervise, discipline and fire them.

PEOs charge a service fee for taking over the human resources and payroll functions of the client company: typically, this is from 3 to 15% of total gross payroll. (See Sloan, Julie. "Cure Your HR Ills". Fortune, March 28, 2007.) This fee is in addition to the normal employee overhead costs, such as workers' compensation coverage, unemployment insurance withholding, and the employer's share of FICA.

The most unscrupulous of labor brokers, derogatorily referred to as coyotes by their victims, exact outrageous fees from their construction worker "clients". In exchange, labor brokers grant these workers the dubious privilege of earning subsistence wages and being housed under substandard living conditions. In the worst cases, workers are entrapped in a form of indentured servitude, working to pay off their debts to the labor brokers; treated like slaves; and moved around the country from job to job like chattel.

Because it is largely an immigrant work force, a labor broker's employees are particularly susceptible to mistreatment and exploitation. Most Hispanic immigrants are not aware of the legal rights afforded them in the United States. But even if they are, they are generally reluctant to seek enforcement of those rights, for fear of being retaliated against or, in the case of undocumented aliens and H2B visa holders, summarily deported.

The use of labor brokers has proliferated in the construction industry in recent years throughout the United States, but especially in states like Texas and Florida, where immigrant labor is plentiful and legal protections for workers are inadequate. In this environment, it has become increasingly difficult for honest, conscientious contractors to compete for construction contracts.

The temptation is strong for good contractors to cut corners somewhere - whether that be labor costs, cost of materials, or quality of workmanship - in order to level the playing field with the cheaters. This creates a precarious situation in which the industry can gradually devolve into a race to the bottom.

Who suffers as a result of these abuses? It's not only construction workers who can fall prey to labor brokers. Ultimately, you as the project owner or end-user may become an unwitting victim of their corrupt practices. How? When workers go unpaid or underpaid, your project runs the risk of being shut down by a government stop-work order. While the situation is being resolved, your project sits idle and falls further and further behind schedule. These delays can be costly. In addition, it could cost you a considerable amount of money to satisfy and/or remove mechanic's liens filed by unpaid or underpaid workers. And labor brokers' unlawful practices tend to invite unwanted scrutiny from government regulators and investigators: the IRS, state revenue agencies, workers' compensation fraud investigators, unemployment insurance agencies, state and federal Departments of Labor, OSHA, etc. Do you really want to have government regulators interfering with the progress of your construction project?

Given the foregoing information, the question is this: Can you afford to have labor brokers operating on your project? The larger and more important the project, the greater the risk you run by allowing them on your job site.

More Information

Payroll Fraud Hot Sheet - October 2017
Fact Sheet On Payroll Fraud Studies - 2017