Payroll tax fraud believed to be spreading throughout Indiana's construction industry

SOUTH BEND, Ind. -- The construction industry across Indiana is facing something many contractors call a growing problem -- payroll tax fraud.

Some contractors are believed to be misclassifying workers, which robs them of many of the regular benefits employees receive and robs the state and federal government of hundreds of millions in tax dollars.

As you drive through Michiana it's easy to see things are pretty good in the construction industry right now. There are new developments around almost every corner, but in recent years contractors like Tim Larson of La Porte-based Larson-Danielson construction noticed something seemed 'off' in some of the bids they were seeing.

" When we bid for a job we know how much is labor, how much is material and we found other contractors bidding at prices we couldn't quite perceive how they were getting there, because we knew how much they were spending on material and we figured they had to be spending a lot less on labor than we were," said Larson.

That's because some contractors are believed to be participating in worker misclassification.

Worker misclassification is the practice of labeling workers as independent contractors instead of employees.

The IRS has a 20 point checklist to determine whether a worker is an employee or an independent contractor.

Do you set the worker’s hours?

Do you provide the worker with tools, equipment or materials?

Do you instruct the workers about when, where and how to work?

If you answer yes to any of these -- the worker is an employee.

While some of the misclassifications are not intentional, many are.

Some suspect it’s because employers don’t have to pay independent contractors workers compensation insurance, unemployment insurance or any local, state or federal taxes.

Mike Stavitzke is the Director of the Indiana, Kentucky and Ohio Regional Council on Carpenters. He says, those savings allow contractors who misclassify to bid on projects at a much lower rate.

Mike Stavitzke - Director IN/KY/OH Regional Council of Carpenters

"Any easy 30 percent right off the top," said Stavitzke. "It's a race to the bottom. It sends the industry on a downward spiral."

That's making it extremely difficult for contractors like Larson who are playing by the rules.

Larson started to question what would happen if his company followed the misclassification model and he started to crunch some numbers.

"The figures I came up with just for our business were startling," said Larson.

Larson found out if Larson-Danielson spent one year misclassifying its workers the company would save big time.

The company would save $800,000 in social security, medicare and federal unemployment taxes. In Indiana unemployment taxes he would save $200,000.

A year of workers comp is equal to about $164,000.

Since independent contractors take care of their own taxes, that would save Larson-Danielson $1.4 million in taxes to the federal government, $332,000 to the state and $112,000 to local cities and counties.

All adding up to a savings of $3,008,000.

"That's just our company and there's hundreds of contractors in the state so you know if everybody starts doing this it's a huge problem," said Larson.

Larson even testified in front of the state legislature with those numbers.

A 2010 study financed by the Indiana Building and Trades and Construction Council estimated Indiana could be losing up to $400 million annually in tax revenue due to misclassification.

It’s a problem on the federal level too. Last week, The U.S. Department of Labor ordered Indianapolis based TWG Construction to pay $82,477 in owed wages to 20 misclassified employees. Investigators found TWG had subcontracted with a temporary staffing company that misclassified workers and failed to pay them required wages under federal law.

TWG happens to be working on some big local projects too, including the Ivy at Berlin Place apartments at Four Winds Field.

"The level of enforcement is directly correlated with how much people comply with the law," said Larson. "If it's not enforced they're not going to comply."

"These people are supposed to be paying payroll taxes on a whole number of people and it's just not happening," said Senator Karen Tallian (D-Ogden Dunes).

Senator Tallian is one of several lawmakers who have tried to take on this issue in the state legislature. She says it was took a while to get other legislators to the point of realizing there is a problem.

Tallian eventually introduced Senate Bill 305 in January of last year that would have established a payroll fraud task force among the Department of Labor, Department of Workforce Development, Department of Revenue and the Worker's Compensation Board.

"My last proposal was to get all of these agencies on board to agree to hire one sort of special investigator so that whenever we would get a complaint that looked like it might deal with worker misclassification we could put this investigator on it and they could actually go through those various agencies to find out and have the ability to really investigate the complaints," said Tallian.

That bill had one committee hearing, but never made it to a vote.

During this current legislative session, Senator David Niezgodski (D-South Bend) is taking a slightly different approach. His bill would simply require the four main agencies to report on worker misclassification each year.

"I'm just looking for reporting so that after three years we can amass that information and can truly determine what the extent of employee misclassifcation in the state of Indiana," said Niezgodski.

The bill was unaminously approved by the Labor and Pensions Committee earlier this month and passed the full senate on the 18th. It now heads to the House.

"For the legislative branch to choose not to receive the information that our government is already producing we think they should have it and it would help them understand the problem better and help themn find solutions to the problem better," said Stavitzke.

"They need to do something about it now, because the potential is there this could be a huge problem in the future if it's allowed to continue," added Larson.

Representative Michael Karickoff (R-Kokomo) has authored an almost identical bill in the House. The hope is they can now combine the two bills and get the bill signed into law.

If you believe you are being misclassified you can file an anonymous complaint with the Indiana Department of Labor by emailing [email protected].

A tip must provide the following basic information in order to initiate an investigation.

1. Name of the employer (Who are the workers working for?)

2. Name of at least one worker who may be misclassified

3. Location where the work is being performed

You can find more information by clicking here.