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Labor Department, IRS Investigate Home Builders' Pay Practices

Construction in the home building industry has plummeted since 2006, with the Southwest U.S. being especially hard hit. The blue bar is single-family homes and the red bar is multi-family construction.
Labor Department, IRS Investigate Home Builders
The Labor Department and the IRS investigate Home Builder pay practices.

A roofer named Rolando worked all summer for a man he called his boss. He said his boss also called himself the boss, right up until the day Rolando fell from a roof and busted his knee.

"So I talked to my boss," said Rolando, who asked to be identified only by his first name.

"And he said, 'You know, you're not really working for me. Only I pay you in cash. You have to go to the hospital on your own,’ " Rolando said.


It was situations like this that made Rolando wish he was an official employee and not an independent contractor.

As it turns out, the Department of Labor and the Internal Revenue Service (IRS) are also interested in this distinction. They are currently investigating the pay practices of many major home builders that led the construction boom in the Southwest. At issue is whether home builders misclassify their workers as independent contractors, rather than employees.

Employers do not pay payroll taxes on independent contractors. A report from the Government Accountability Office found that worker misclassification cost the government $2.72 billion in unpaid federal taxes in 2006. Plus, there are unpaid assessments for state workers' compensation and unemployment insurance programs.

Since then, both the IRS and the Department of Labor's Wage and Hour Division have dramatically increased the number of auditors they have on staff – the latter by more than one-third.

Employment lawyer Julie Pace has noticed.


"I would say that in the last two years, we have seen a huge increase of government regulation on companies," Pace said. "So we have seen numerous, numerous audits, we’re busy all the time. Whether it’s an [Immigration and Customs Enforcement] audit or a [Department of Labor] audit or an OSHA violation – we’re very busy under this administration."

Pulte, D.R. Horton, and KB homes – all giants in the home building industry in the Southwest – declined to comment on the current investigation. A spokesman for the Home Builders Association of Central Arizona said they "lack understanding on the implications of any possible finding."

But Leann Hull, a window and door contractor in Phoenix, is well aware that if the findings indicate she can’t use contractors, and instead has to hire employees, she will certainly go out of business.

Hull said: "There is not enough business in this valley to keep employees employed in this industry."

A few years ago, during the boom, her company employed six people.

"When business is good, you can have employees," she said. "When jobs are abundant, you can hire people and guarantee that they’re going to have work. Right now I can’t do that."

In fact, business is now so bad that her company employs no one, only hiring contractors when the occasional job comes up. (Hull doesn't even draw a salary anymore, and her husband had to leave the state to work in Alabama, processing claims for the BP oil spill.)

When businesses like Hull’s do hire contractors, Pace said they have to navigate the gray area between employees and contractors carefully. The line can be incredibly complicated to draw.

For example, in the case of Rolando the roofer, his boss required that he provide his own tools – which sounds like it would make him an independent contractor. But his boss also told Rolando exactly what time he needed to start and stop work, and he regulated breaks ¬– definitely the stuff of an employer, employee relationship.

"Some people will say: ‘OK they pass our test,’" Pace said. "They're truly independent. They run their own crews, they have their own equipment, they're really solid. Other people, we say: 'These are employees. You are going to be in trouble if you don’t listen to us!'"

For businesses who fear they might have been incorrectly classifying their workers, the IRS recently announced a surprise break: A chance to come forward and make a minimal payment, instead of waiting for an IRS audit, and the huge penalty fees that may or may not go along with it.