Construction wage theft 'pervasive' in Midwest
Paying ‘under the table’ hurts workers and robs states of critical funding, says new study
Construction workers repair CTA tracks in Chicago. Public workers are largely protected by Illinois’s Prevailing Wage Act, but a new study suggests payroll fraud is rampant in the construction industry across the upper Midwest. (Flickr/Chicago Transit Authority)
By Ted Cox
Wage theft in the construction industry is a “pervasive problem” across the upper Midwest, hurting both workers and state taxpayers, according to a new study released Thursday.
The study, conducted by the Illinois Economic Policy Institute and the affiliated Midwest Economic Policy Institute, finds that 10 percent of Wisconsin construction workers, 20 percent of those in Illinois, and 23 percent in Minnesota are victims of payroll fraud — usually in workers being paid “off the books” in cash or in being improperly categorized as independent contractors.
Workers paid in cash, “under the table,” are typically paid at a lower rate, according to the study, “The Costs of Wage Theft and Payroll Fraud in the Construction Industries of Wisconsin, Minnesota, and Illinois: Impacts on Workers and Taxpayers.” They’re often deprived of overtime pay and minimum-wage protections.
Whether paying in cash or mislabeling workers as a non-salaried employees, contractors typically dodge payroll taxes and mandatory contributions to state unemployment insurance and workers’ compensation funds, thus costing taxpayers, who have to make up the difference.
“Wage theft — including worker misclassification and payroll fraud — hurts workers, puts law-abiding businesses at a competitive disadvantage, and shortchanges taxpayers,” said Nathaniel Goodell, principal investigator for the report for MEPI. “While prior research has shown that between 12 percent and 21 percent of construction workers face these abuses, it is alarming to see the upper Midwest’s construction industry at the high end of that scale.”
The study arrived at its findings by comparing data from the U.S. Census Bureau against payroll records submitted to state unemployment-insurance programs — finding that, of nearly 538,000 Wisconsin, Minnesota, and Illinois construction workers, almost 100,000, 18 percent, “were either misclassified as independent contractors or paid off the books in cash,” according to a news release.
Illinois might have been in the midrange with 1 in 5 workers taken advantage of, but in raw numbers it had the largest problem, due to its vital construction industry, with 53,000 of the estimated 97,000 affected workers across the three states.
The study found that workers paid in cash or labeled as independent contractors “earn an average of 29-36 percent less in total compensation than their properly reported peers — a pay gap ranging from $23,500 per year in Minnesota to nearly $30,000 per year in Wisconsin,” the release stated. Those workers also do not accrue Social Security benefits for any future retirement.
The study estimated that the pervasive practice “costs Wisconsin, Minnesota, and Illinois a total of $362 million in state income taxes, unemployment-insurance contributions, and workers’ compensation premiums every year.” More than half of that total, $186 million, was in Illinois.
“The staggering differences in compensation and state tax contributions between properly reported employees and workers who are misclassified or paid off the books highlights a system that all but incentivizes contractors to flout the law in order to win project bids,” said ILEPI Policy Director Frank Manzo IV, a co-author. “With our region already struggling in the face of the COVID-19 pandemic, it is vital to shine a light onto the extraordinary costs that these illegal practices are imposing — not just on working families and honest businesses, but on every single taxpayer.”
According to the study, residential construction is a particular problem. Illinois construction workers on public-works projects are typically protected under the state’s Prevailing Wage Act. Minnesota, meanwhile, has “enacted a law that includes fines of up to $100,000 and imprisonment of up to 20 years when an employer, with intent to defraud, fails to pay employees all wages required by law or attempts to make it appear that wages paid to employees were greater than actually paid,” the release stated.
The study called for added emphasis on enforcement across the construction industry, stating: “To combat the problem, states can increase enforcement efforts or strengthen punitive actions against offenders, including making payroll fraud a crime. Payroll fraud from worker misclassification and illegal employment in the construction industry has severe negative consequences for workers, law-abiding contractors, and taxpayers.”
“Employee misclassification, payroll fraud, and other forms of wage theft are crimes that cause a multibillion-dollar drain from the pockets of working families, local governments, and state budgets — at a time when our communities can least afford it,” Manzo said. “States and localities in other parts of the country are proving that by enacting sensible regulatory, enforcement, and procurement safeguards, we can contain these abuses and make sure that crime doesn’t pay.”