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Lori Prichard reporting
Produced by Kelly JustThousands of Utah construction workers are employed in dozens of large projects not as traditional laborers, but as "owners" under a workforce re-classification process that critics say could allow employers to avoid paying benefits, payroll taxes and workers compensation insurance, according to an investigation by KSL Television.
The Utah Attorney General's Office and the Utah Labor Commission told KSL they are each looking into the practice, which contractors say has allowed such companies to under-bid competitors on construction projects by as much as 50 percent. The companies who pursue the practice say it is legal under Utah's limited liability laws, and isn't designed to shirk any tax or payroll obligations.
But the dozens of construction firms who feel their businesses have been hurt by the practice are not shy in speaking out.
"They're just ravaging whatever jobs they can find," says Alan Burrow, superintendent of Daw Construction Co., based in Draper.
Jeff Moffat of Moffat Brothers Plastering says, "We usually get 30, 35 percent of our bids, and right now we're at, probably, 5 percent of our bids."
More than 20 companies were represented at a recent meeting with KSL, convened after contractors sought help in exposing the so-called "re-classification" from laborers to owners to skate around traditional employer obligations.
An example, they say, is the company U & I LLC. On its website, it says if a business signs up for its services, that business's "employees" now become "owners" in the U & I LLC. But these owners "still work on the jobs that you assign and take instruction and direction from you." The only difference is, businesses no longer have to cover payroll taxes, workers' compensation or unemployment. The website also says businesses that sign up will save a business "18 to 26 percent" off its labor costs.
An officer of U & I LLC told KSL that laborers are simply classified as "self-employed" and are given instructions and proper forms to ensure they pay taxes. Dean Kesler, a spokesman of U & I, said the business plan was reviewed by lawyers and accountants and the company is confident they are operating within legal boundaries.
The companies that specialize in such reclassification services are typically compensated by contractors who they sign up for their services, which generally consist of advice and help facilitating the change in employment classifications for the respective workforces.
For new "owners" like Jesus Delgado, such reclassification may be legal, but it is expensive. He now is responsible for covering costs traditionally borne by employers, but his wages have not increased. He is one of an estimated 3,000 employees-turned-owners who have agreed to the reclassification, in many cases to avoid unemployment.
Mr. Delgado says he signed up with another company offering similar services: CSG Workforce Partners.
Even though one would expect an "owner" to have influence over their workday, Delgado says he still took orders from the same contractors. He was occasionally ordered to work six days a week, which job site to report to and what exactly to do. Then, a few months into his construction job, he says he was fired.
KSL reviewed three months of Delgado's pay stubs. Nowhere does it show how many hours he worked or the rate he was paid. There was also $400, or 12 percent, taken out of those checks, but no indication of where the money went and to whom.
"I didn't see this as being fair," says Delgado in Spanish. "Too much work and too little money, but we had to put up with it."
CSG Workforce Partners
"We're trying to build a workforce who wants to be there that wants to be better," says Scott Severe of CSG.
CSG says it has 1,500 member owners. It claims its workforce is on 50 to 60 percent of construction sites, including some of the state's biggest projects. The company estimates it will own 70 to 80 percent of the workforce in five years.
CSG also stresses it operates legally. "There are laws out there right now and we're compliant," says Severe.
The distinction within the LLC law is important. CSG as well as U & I LLC classify member owners as self-employed rather than as an independent contractor or employee.
"They get a K1 rather than a 1099," says CSG in a hidden audio recording KSL obtained from a business owner.
That audio recording also contains CSG's sales pitch. In it, the company says, "We're an LLC. It's a pass-through company, so each individual has their own responsibility. If somebody doesn't file their taxes -- if one person, if 100 percent of people don't -- it's not our responsibility."
KSL's source raises concerns about overtime and wage claims in the meeting with CSG. The source says, "Can a disgruntled worker, ‘I should have gotten paid more for that,' go through the Labor Commission?"
CSG says in response, "An employee can do that," implying that an "owner" could not.
According to critics, the distinction between owner and employee is important because there are few job protections afforded to an LLC owner as compared to an employee.
When it comes to the number of hours a member can work, the CSG representative says in the audio recording, "Can they work more than 40 hours without working overtime? Yes!"
The classification of employee versus owner is important, too, when it comes to a worker's immigration status.
"You can own a U.S. entity and be from anywhere," says CSG to KSL's source.
"As an owner of a company, you wouldn't be able to E-Verify me and I wouldn't be able to E-Verify you unless we were working as employees of that company," says CSG.
According to the Department of Homeland Security, E-Verify is an Internet-based system that gives the employer the ability to determine whether the employee is eligible to work in the United States.
"Now you have more control. Before with an employee, you don't have control. You have no control," says CSG in the audio recording. "Now, you have total control. It's a beautiful thing."
"That's one of the dilemmas," says Dennis Chavez, owner of a local drywall business. "If you are a member of an LLC working under those auspices, you've lost your rights," he says.
Who benefits
With the laborers structured as self-employed under the LLC, who benefits? Critics say it's not the employee who is now considered an owner of the LLC. KSL contacted several of Utah's most prominent contractors. This was their reaction to the new labor system.
"An Americanized sweatshop, really, is the way I can see it," says Jeff Moffat of Moffat Brothers Plastering.
"It's going to get worse," says Steve May, owner of May's Custom Tile and Granite.
"I think it's morally wrong, and also, I think it's ethically wrong," adds Mr. Chavez of the drywall company.
"Everybody's losing, including the employee that's not smart enough to know but is desperate enough to want a job," says Alan Johnson, president of IMS Masonry.
These business owners say they are losing millions of dollars because they're being out-bid by competitors who have signed up with these labor companies. Even so, they say they do not want to run their businesses like this.
"I'm not going to be that way," says Johnson. "I'll quit business before I'll be that way. It's not right."
"There are a lot of different victims, and we're concerned about that," says John Swallow, Utah's Chief Deputy Attorney General.
He says the state is aggressively investigating the situation he describes as a potential abuse of Utah's LLC Act. Swallow says his office will make sure construction workers are protected, the state gets the taxes it deserves and construction companies can compete on a level playing field.
"We expect that within the next couple of months we'll have identified a couple of companies that are really abusing the laws and be able to start the prosecution phase of it," says Swallow.
The deputy commissioner of the Labor Commission, Alan Hennebold, says his agency is also aware of the issue.
"We will see individuals who are clearly employees called independent contractors. Now, we're seeing them called members of LLCs. The beat goes on," says Hennebold.
"We take it very seriously and we view it as central to our responsibility to look into these things and use all the tools we have to correct them, if we find an abuse," adds Hennebold.
The Utah State Legislature has established a task force to study the issue of worker misclassification as a whole. The federal government has pending legislation relating to this issue.
E-mail: iteam@ksl.com
