Purging the Underground Economy in Texas

workersIn Texas, we pride ourselves on job creation and entrepreneurship. This is the Promised Land, where you can be in charge of your own destiny. For many, if not most, this is true. For others, that rhetoric is used to dodge the law, pay people off the books, avoid taxes and contribute to a cancerous underground economy.

Let me explain.

One of the most overlooked reasons we have a diminished middle class is the erosion of the employer-employee relationship. Decades ago, most people were the employee of a company where they would work for 30 or more years, then retire with a gold watch and a pension. Not anymore. In construction, trucking and numerous other professions, that relationship has been replaced by a system in which companies shun the hiring of employees in favor of making them “independent subcontractors.”

This intentional misclassification of workers, also known as payroll fraud, is how some companies avoid paying minimum wage, payroll taxes and workers’ compensation coverage.

Also, this is precisely how so many companies end up with illegal immigrants working on their projects. People often ask, “Who hires all these illegal immigrants?” The answer in most cases is that they, in effect, hire themselves. If they work as a contractor, they are their own boss and are therefore responsible for their own taxes and health coverage.

This is so prevalent in the construction industry that researchers at the University of Texas say more than 40 percent of such workers across the state are the victims of payroll fraud. That’s more than 300,000 workers and about $7 billion in wages not reported to the Texas Workforce Commission. This causes the state to miss out on at least $54 million in unemployment insurance each year. The feds lose untold billions in Social Security payments.

If you think it doesn’t affect you, consider this: When those workers get hurt on the job and they’re dropped off at Parkland with no health insurance or workers’ comp, who picks up the tab? How does it feel to subsidize the labor costs of companies that rake in millions, if not billions, of dollars each year? A former construction worker who suffered a spinal cord injury when he fell on a job site in Houston pointed out to me this cruel irony: If a piece of the building fell, there’s insurance to cover replacing that inanimate object, but many of the people on the job had no coverage at all.

I’m sympathetic to conservative arguments against increased regulation of almost any business. But this is a rule-of-law issue, and legitimate businesses can’t compete with those who cheat. That’s why more and more conservative Republicans in state leadership are saying Texas must crack down on this growing problem.

Texas Workforce Commissioner Tom Pauken, a Republican and a proud former member of the Reagan administration, recently spearheaded the commission’s unanimous support for rooting out payroll fraud on all government contracts in Texas. After the Texas Construction Association, a trade group, testified before the commission that legitimate business can be underbid by cheaters by as much as 25 percent, Pauken said,  “This is a problem that has to be corrected, and we’ve come up with a workable solution.”

State Sen. John Carona, R-Dallas, has instructed his staff at the Senate Business and Commerce Committee, which he chairs, to start drafting legislation similar to what dozens of other states have passed.

“The message is unmistakable,” Carona told me. “Winners don’t cheat, and the cheaters’ day is over. I will be working with stakeholders, using what we’ve learned in many other states, to close the loopholes and restore fair competition to the construction industry.”

Most of the builders in North Texas I contacted about this issue did not respond, but those that did said they generally support what Carona wants to do. David Bloxom, president of Speed Fab-Crete in Fort Worth, said: “This misclassification activity puts a competitive disadvantage on those companies who fairly report their workers’ classifications correctly and fairly. We do plan to follow the development of the legislation specifics and offer our input as opportunity arises.”

It looks like this legislative session in Austin is going to be full of legislation on a host of red-meat issues as varied as additional restrictions on abortion and guns in school classrooms. Those debates promise to be nasty and partisan, but dealing with companies that are cheating their workers and taxpayers alike should be a bipartisan no-brainer. Let’s hope lawmakers approach it that way.

This column originally appeared in the Dallas Morning News.

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