Racine slated to testify in Congress in wake of AG’s report on illegal worker misclassification in DC’s construction industry

DC Attorney General Karl Racine is set to testify Thursday at a U.S. House hearing on misclassification of employees as a form of payroll fraud, the subject of a report released earlier this month by Racine’s office on how the practice affects the District’s construction industry.

Racine is one of six witnesses called by the Education & Labor Committee’s Workforce Protections Subcommittee for a 10:15 a.m. hearing on “Misclassification of Employees: Examining the Costs to Workers, Businesses, and the Economy.”

The report commissioned by Racine’s office — “Illegal Worker Misclassification: Payroll Fraud in the District’s Construction Industry” — found that by illegally misclassifying employees as independent contractors, construction companies in the District can evade at least 16.7% of the cost of doing business. The report is the latest step in the attorney general’s broad effort in recent years to curb wage theft in DC.

“Here in the District we believe it is incredibly important to protect workers’ rights, including workers’ rights to fair wages, overtime pay, sick and safe leave, and to help create economic opportunity for all of our residents,” Racine said at a Sept. 10 panel event at Georgetown University. Safe leave enables workers to take job-protected time off to cover their needs if they or an immediate family member are the victim of domestic violence, stalking or human trafficking.

Racine delivered the report’s findings at a forum hosted by the Kalmanovitz Initiative for Labor and the Working Poor, within Georgetown’s School of Continuing Studies. The initiative works to develop innovative strategies and public policies to improve workers’ lives in a changing economy, according to its website.

“Our local economy clearly is growing in DC,” Racine said. “But what we don’t see often enough is the very fact that workers, oftentimes immigrant workers, are being treated poorly and are having their wages taken from them.”

By treating employees as contractors, companies are able to skirt paying payroll taxes and Social Security, overtime, sick leave and other benefits that would otherwise be due. About two-thirds of the savings from misclassification is taken from workers and the remaining third from society at large in the form of unpaid taxes, according to the report. The authors of the study are Dale Belman, a professor at Michigan State University’s School of Human Resources and Labor Relations, and Aaron Sojourner, an associate professor at the University of Minnesota’s Carlson School of Management.

Within DC’s construction industry, “we have things such as a lot of undocumented workers,” Sojourner said at the Georgetown event. “They are not in a good position to go to their boss and go, ‘You know, you owe me an extra $4 an hour. I’ve done the calculations — if you classified me properly, this is what I should be getting.’”

The professors found that 16.7% is a conservative estimate because misclassification of workers is often accompanied by other forms of wage theft that amplify its effects. “Coupled with even a modest amount of wage theft, the cost evasion of doing business illegally can reach 27 percent,” Belman and Sojourner wrote in the report, defining a “modest” amount in this case as a scenario in which workers take home 90% of their pay.

“The misclassification of workers, if I wanted to simplify it to one word, I’d call it wage theft,” said Raul Castro-Ramirez, a team leader with the Keystone + Mountain + Lakes Regional Council of Carpenters, during one of the day’s panel discussions. “Because that’s what it is.”

Castro-Ramirez also spoke to what Belman and Sojourner referred to as a “race to the bottom.” When some construction firms can underbid with these kinds of illegal tactics, it makes it impossible for other companies to compete legally.

“The misclassification undermines responsible contractors’ chances of increasing wages for their workers,” Castro-Ramirez said. “So in the long run, workers will make less money or get no pay increases.”

“The situation has gotten so bad in the industry that if you don’t cheat, you go out of business,” he added.

The report notes the lack of any DC-specific study on the prevalence of misclassification, but cites a 2013 report from the Internal Revenue Service that found 15% of employers nationwide engaged in the practice. The authors also wrote that the construction industry “is known for rampant misclassification,” with one study finding one-third of construction workers in the South affected by the practice.

Misclassification of workers is gaining nationwide recognition as a threat to workers’ rights, with today’s congressional hearing the latest indication of growing concerns. On Sept. 18, California Gov. Gavin Newsom signed into law Assembly Bill 5, which sets out a strict set of conditions under which workers can be considered contractors rather than employees.

DC’s Workplace Fraud Act of 2013 lays out penalties for misclassifying workers that include risk of debarment for employers. It also defines the right of workers to seek up to triple the damages from lost wages and benefits in civil suits.

Racine said his office has been collaborating with the DC Council to expand his authority to bring criminal cases for worker misclassification. So far, the office has launched more than 30 investigations into wage theft and worker misclassifications, including one that led to a lawsuit filed last August. 

In a case that is still pending in DC Superior Court, Racine alleged that Power Design, a national electrical contracting company with more than $100 million in annual revenue and 10 major construction projects underway in DC, illegally misclassified 535 employees as private contractors. A company spokesperson told the Washington Business Journal at the time the suit was filed that “Power Design believes we are in compliance with all applicable laws and regulations in DC.”