The Economic and Fiscal Cost of Employer Fraud in the New York City Construction Industry. A Fiscal Policy Institute Report

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1 The Economic and Fiscal Cost of Employer Fraud in the New York City Construction Industry A Fiscal Policy Institute Report June 2013

2 Introduction The Fiscal Policy Institute has prepared several reports on the New York City construction industry, and other research reports on New York s labor market, economic trends, social insurance programs, and the minimum wage. In 2004, in conjunction with the Building Trades Employers Association and the Consortium for Worker Education, FPI published Building Jobs: A Blueprint for the New New York, a study of the white collar or nontrades segment of the construction employment market. In April 2006, the New York City Employment and Training Coalition and the New York City Workforce Investment Board published a profile of the New York City construction labor market prepared by FPI. A brief literature survey, The Economic Development Benefits of Prevailing Wage, was released in May These and other FPI reports can be found at: In 2007, FPI prepared two major reports on the construction industry. The first, issued in April 2007, focused on the government-supported affordable housing sector: The Underground Economy in the New York City Affordable Housing Construction Industry. The second extended that analysis of labor practices to the entire construction industry and was published in December 2007: Building Up New York, Tearing Down Job Quality. Taxpayer Impact of Worsening Employment Practices in New York City s Construction Industry. That report provided the first rigorous estimates of the number of workers misclassified as independent contractors or paid off-the-books entirely, and estimates of the economic and fiscal costs associated with those practices. A closely related FPI report was released in January, 2007, New York State Workers Compensation: How Big Is the Coverage Shortfall? That report demonstrated the need for New York State to undertake a concerted enforcement commitment and strategy to ensure compliance with the state workers compensation laws. The workers compensation report also examined the issue of the misclassification of workers as independent contractors by employers seeking to shirk their responsibility for payment of payroll taxes, social insurance premiums and employee fringe benefits. Since 2007, the construction sector has gone through wrenching changes as a result of the Great Recession of and the resulting financial crunch and downturn in construction activity. Payroll employment in New York City construction declined by 16 percent between 2008 and A gradual rebound has been underway since The New York Building Congress recently reported that construction spending reached $30.6 billion in 2012, a 3.6 percent gain over 2011 and the highest level since Despite improvement in recent years in labor law enforcement by the New York State Department of Labor, employment fraud continues to be a major problem in the New York City construction industry. Although construction payroll employment remains below 2008 peak levels, it appears that the number of workers misclassified as independent contractors or paid off the books is even greater today than it was in This report provides an update to FPI s earlier report examining the extent of employer fraud and its associated economic and fiscal costs, costs that are substantial and are borne by workers, taxpayers, and law-abiding construction employers. Page 1

3 Payroll employment in New York City construction fell by 21,000, or 16 percent, from its peak in 2008 to Over the past year, construction employment has started to rebound. Inflation-adjusted wages reported to the state are at about the same level as in 2000, having declined slightly each year for the past three years. The payroll employment data reported to the state in connection with the payment of Unemployment Insurance payroll taxes is the most reliable measure of construction industry employment that is compliant with state requirements for Unemployment Insurance and Workers Compensation coverage. This payroll data is known as the Quarterly Census of Employment and Wages (QCEW), and it covers both trades and non-trades workers employed by construction companies. An annual survey of households conducted by the U.S. Census Bureau (the American Community survey, ACS) indicates that 207,100 persons worked in the construction industry in New York City in The ACS data include commuters as well as residents, as does the QCEW data. The ACS data is much higher than the 107,829 figure reported by the QCEW data since it includes self-employed construction workers (about 29,200), but also those who are misclassified as independent contractors or paid off the books by construction employers. Page 2

4 In 2011, there were an estimated 152,700 trades workers in the New York City construction industry. This number includes 82,400 payroll workers reported on QCEW payrolls as being covered by Unemployment Insurance, and 70,300 workers who are either misclassified as independent contractors or paid off the books by their employers. These 70,300 workers who are not covered by Unemployment Insurance, and presumably not covered by Workers Compensation, are included in the American Community Survey. In the table above, we include 54,000 of the workers identified by the Census Bureau as nonemployers working in construction (see the next page) as trades workers. These 54,000 nonemployers are considered misclassified independent contractors. About 6,000, or 10 percent of the construction nonemployers are assumed to be non-trades employees. Based on comparing the ACS and QCEW data, besides the nonemployers there are an estimated 16,300 construction workers who must be paid off the books since they are neither part of the QCEW data reported to the state, or the nonemployers for whom 1099 forms are submitted to the Internal Revenue Service. Occupational data from the state labor department show 14,400 managers and surpervisors in the New York City construction sector. Another 11,000 wage and salary workers from the QCEW series are non-managerial non-trades workers in construction. Thus, the entire count of construction workers in the QCEW comprises these two categories plus the 70,000 union workers and 12,400 non-union employees shown in the above table. Page 3

5 Figure 3:Rapid increase in the number of nonemployers in New York City construction, , but sharp decline in average receipts. The Census Bureau compiles a data series for Nonemployers based on workers whose pay is reported to the Internal Revenue Service on 1099 forms (wages and salaries for employees are reported to the IRS on W-2 forms). Nonemployer data for 2010 the latest available show 59,815 such workers for the New York City construction industry with total receipts of $1.4 billion (an average of $23,553 per nonemployer). For all intents and purposes, nonemployers in construction are workers who are misclassified as independent contractors. The labor department presumes there are no legitimate independent contractors paid on 1099 forms in construction. Paying workers that way rather than as employers is understood to be fraudulent activity intended to circumvent payment of UI and workers compensation taxes, and as a way to negate most other long-established labor protections. Page 4

6 Misclassification of workers as independent contractors is a huge problem in New York City and it is particularly prevalent in the construction industry. In Congressional testimony in 2010, then-new York State Labor Commissioner Colleen Gardner stated: Employee misclassification is pervasive and harmful to our employers, workers, government, and our economy. We must combine forces and take new steps to combat it. 1 In 2010, the NYS Department of Labor completed 14,500 audits and investigations of compliance with the state s Unemployment Insurance program and found 218,000 cases of workers misclassified as independent contractors across the state, with construction one of the leading sources of the problem. $40 million in unpaid taxes were recovered. 2 In 2011, the NYS Department of Labor completed 14,800 audits and investigations of compliance with the state s Unemployment Insurance program and found 131,700 cases of workers misclassified as independent contractors across the state, with construction one of the leading sources of the problem. $48.5 million in unpaid taxes were recovered. 3 Often, an employer found to be skirting the law by failing to pay into the unemployment insurance trust fund also shirks their responsibility to pay a workers compensation premium for the affected workers. Evasion of responsibility for paying into unemployment insurance and workers compensation is illegal and costs workers and law-abiding employers hundreds of millions of dollars a year. 1 Testimony of Colleen C. Gardner, Commissioner of the New York State Department of Labor before the U.S. Senate Committee on Health, Education, Labor and Pensions, Leveling the Playing Field: Protecting Workers and Businesses Affected by Misclassification, June 17, 2010, p Annual Report of the Joint Enforcement Task Force on Employee Misclassification to Honorable Andrew M. Cuomo, Governor, State of New York, Feb. 1, 2011, p Annual Report of the Joint Enforcement Task Force on Employee Misclassification to Honorable Andrew M. Cuomo, Governor, State of New York, Feb. 1, 2012, p. 8. Page 5

7 Using the estimate of 152,700 construction trades workers developed above, and average wages for each category of worker as indicated in the Appendix, estimates were made of the payroll taxes and social insurance (unemployment insurance and workers compensation) premiums that are not being made. Based on an estimate by the IRS that about half of the workers paid on 1099 forms legally comply with the requirement that they pay the entire amount (both the employer and the employee share) of payroll taxes (for Social Security and Medicare), we assume that half of misclassified independent contractors are paying the full amount of payroll taxes and that the other half are not. Since there is no mechanism for nonemployers to pay UI or workers compensation taxes, we assume that none of the nonemployers are making these payments. On an annual basis, employer fraud in the construction industry costs $423 million, with $235.0 million of that unpaid workers compensation premiums and $44.5 million in unpaid unemployment insurance tax. Page 6

8 Page 7

9 Fraudulent employment practices on the part of construction companies fuels the underground economy where taxes go unpaid. An estimated $99 million in individual income tax payments were not made by the 43,300 construction workers who are either misclassified as independent contractors and not paying taxes and those who are paid in cash off the books entirely. This estimate does not include unpaid business income taxes several assumptions would be necessary to generate realistic estimates. This also assumes that half of all misclassified construction workers are fully complying with the payment of payroll and personal income taxes. Just the personal income taxes for this half of misclassified workers come to $86 million a year. The above estimates are made for single workers with no dependents, and the unpaid income taxes are based on the average wages assumed for each category of worker. Obviously, at higher wages, potential personal income taxes would be greater. Page 8

10 Adding together these three sets of calculations allows a total estimate of the economic and fiscal costs of employer fraud in the New York City construction industry: $687 million a year. This amount does not include the lower wages suffered by construction workers who are under-paid or unpaid for their labor. The $687 million figure includes $235 million not paid into workers compensation funds, $44 million not paid in state and federal unemployment taxes, $42 million in unpaid New York State and New York City personal income taxes, and $165 million in health care costs that are borne by New York and federal taxpayers in Medicaid or for uncompensated care, the cost of which is tacked onto the health insurance premiums paid by law-abiding New York employers who provide health insurance. Another way to view these costs is that they come to an average of $9,778 per worker who is either misclassified as an independent contractor or paid off the books entirely. Assuming such a worker averages 1,840 hours of work per year (46 weeks at 40 hours per week), that comes to $5.31 per hour. This is a conservative estimate of the economic and fiscal costs of employer fraud in the construction industry that are shifted to taxpayers and law-abiding employers. Page 9

11 Figure 8 separates out from Figure 7 the NYC construction employer fraud figures that are borne within New York State, either by New York taxpayers or New York employers who suffer from the non-compliance with unemployment and workers compensation systems. Those costs borne within New York State total $422.2 million annually. Note: it is assumed that federal taxpayers bear half the public cost of Medicaid for construction workers without health insurance. As noted earlier, these estimates do not include the costs of lower wages suffered by construction workers who are under-paid or unpaid for their labor. Page 10

12 Page 11

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