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Companies Win Federal Contracts While Flouting Labor Law

Economy McClatchy Tribune News Service National News

Companies Win Federal Contracts While Flouting Labor Law

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By Mandy Locke and Franco Ordonez, McClatchy Washington Bureau

RALEIGH, N.C. — Robert Malick has weathered plenty of uncertainty in the 22 years he’s run a multimillion-dollar heating and air conditioning firm.

His secret to success: Follow the money and the people who can get it.

To do it, his company, Southern Mechanical, landed government-backed housing projects and used a hiring strategy that federal officials have been trying to combat for years. On payroll forms he filed on jobs around the Southeast, his Nashville, Tennessee company left blank a space for tax withholding and explained: “1099 employees pay their own taxes.”

“It puts the monkey on their back to produce instead of being an hourly employee that just hangs out on the job,” Malick said in an interview.

Treating his workers as independent contractors saves Malick on payroll taxes and unemployment insurance, nearly 10 percent of wages. It also may run afoul of numerous state and federal laws and regulations, and it undercuts his competitors.

Southern Mechanical was one of hundreds of companies cashing in on U.S. government-funded projects while likely disregarding the law, a McClatchy investigation reveals.

Roofers, painters, and bricklayers paid meager hourly wages are required to file taxes as if they were self-employed, which means paying their share and their companies’ share to Social Security and Medicare. But many live in the underground economy, paying no taxes or less than they owe.

In North Carolina, nearly 45 percent of the 826 companies taking part in construction of federally funded or backed affordable apartments during the recession deducted no taxes from laborers and mechanics. In Texas, as many as one-third of the companies on federally funded projects appear to have misclassified workers.

The problem persisted in Florida, too, where 20 percent of companies on these projects treated manual laborers as independent contractors. The issue isn’t isolated to the South: A random sampling of construction projects across the country shows that 14 percent of 235 companies filing payroll reports withheld no taxes from workers generally considered employees.

Some of those companies had a history of other problems:

— South East Construction Corp. of Wilmington, North Carolina, had its certificate to do business revoked by the North Carolina secretary of state in 2010 for failure to file taxes with the state Department of Revenue. Two years later, it landed a job doing carpentry work on an affordable housing development in Wilmington. The revocation is still in place, according to records with the secretary of state. The company owner, James Haverly, could not be reached.

— Just a week before VR Enterprises Group of Miami started work on a low-income housing project in Key West, one of its employees filed a lawsuit accusing the company of failing to pay overtime wages. A judge awarded the employee $3,180. Company owner Victor Lavastida now runs a construction company called Brave Builders, which is owned by Sandra Morales. That company is being sued by six former employees, who say wages weren’t paid.

Morales defended her practice of treating workers as independent contractors, saying the general contractor advised her to do that. The general contracting firm didn’t return calls requesting comment.

Southern Mechanical has been treating hourly workers as independent contractors for years in plain sight of the government with no pushback, federal payroll records show.

Although revenue collectors from Washington, D.C., to Indiana and Mississippi have pursued Southern Mechanical for various unpaid tax debts, the company hasn’t been blocked from taking part in government contracts. While the federal government sought $260,000 in unpaid corporate taxes from the company in 2013, Malick’s workers were busy installing units in more than20 housing projects backed by the government throughout the Southeast.

The government has a history of doing business with companies that have tax or other legal problems. Inspectors at the Government Accountability Office found that at least $24 billion in stimulus funds went to businesses owing more than $750 million in unpaid federal taxes, according to a 2011 report. The year before, GAO investigators found that half of the 50 companies with the most egregious federal labor-standards violations had government contracts.

Even when the proof is volunteered — through the company owners’ admissions in payroll records — regulators rarely take action.
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Southern Mechanical was industrious during the construction slump as many competitors limped along. Malick said his firm landed work on more than 50 federally funded or backed projects.

The company more than doubled its operating revenue during the slump, from $6.7 million in 2008 to $15 million in 2012, according to Dun & Bradstreet, a business information company that collects data from lenders.

The general contractors who hired Southern Mechanical to take part in federal contracts either disregarded or missed red flags. Indiana state regulators filed more than 30 tax warrants against Southern Mechanical between 1998 and 2009; in 2001, the state revoked its license to do business there.

The liens involve unpaid sales taxes and haven’t been settled, according to Robert Dittmer, spokesman for the Indiana Department of Revenue. Malick said the issues dealt with a beef he had with a general contractor and that the company was still doing business in the state.

Since 2006, Southern Mechanical’s certificate to do business in North Carolina had been suspended for failure to file annual tax returns, yet the company continued to do business in the state. In July, after being asked by McClatchy about the suspension, the company contacted the Revenue Department and was reinstated by the secretary of state.

The company has another problem in North Carolina: Allowing unlicensed HVAC mechanics to be subcontractors is against the state licensing board’s regulations. While Southern Mechanical itself is licensed, its workers are not. That would be OK if they were treated as employees, but it’s not if they’re independent contractors.

After speaking with a reporter this summer, company officials reported their use of 1099s to the North Carolina licensing board. The board is investigating.

Layers of construction managers, developers, and government officials could have stopped Southern Mechanical from treating workers as subcontractors but didn’t.

The U.S. Department of Housing and Urban Development is ultimately responsible for employees being paid correctly on these projects, but it pushes the task of collecting and reviewing payrolls onto local officials.

HUD doesn’t train the locals to spot the problem of misclassifying workers as contractors, however. Even when HUD labor-compliance officials at the regional office in Atlanta reviewed Southern Mechanical’s records on projects insured by the Federal Housing Administration, they didn’t raise any issues.

Southern Mechanical’s controller said she took the lack of reprimands as a sign the company was doing things properly.

“I’m sure if there was an issue, especially with a HUD job, somebody would have caught it before now,” Shannon Wilkins said.

Photo: AgriLife Today via Flickr

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