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Carpenters union says some employers are committing millions in payroll fraud

Two men in orange shirts hand a third man in a blue shirt a flier.
Mid-America Carpenters Regional Council
Members of the Mid-America Carpenters Regional Council distribute fliers detailing allegations of wage theft and payroll fraud among Missouri construction companies in O'Fallon, Missouri, in 2023. The union says Missouri and Kansas are losing out on hundreds of millions of dollars in lost income state tax revenue and contributions to workers' compensation and unemployment insurance funds.

Some construction companies in Missouri and Kansas are illegally misclassifying employees to cut down on payroll costs and avoid millions of dollars of state and federal income taxes, according to a pair of studies from the University of Missouri-Kansas City.

The research, which received funding from the Mid-America Carpenters Regional Council, finds both states have more than 30,000 misclassified workers. Dave Wilson, who’s spent decades as a representative for the carpenters union, described the situation as “an epidemic of enormous proportions.”

“We’ve seen the construction industry become polarized, where we have big union firms that pay decent wages and benefits and provide health care and on the other side those contractors willing to cheat and take advantage of workers,” he said.

This can look like construction workers being paid in cash or check as though they’re independent contractors, Wilson said.

“They get paid per hour, and typically it’s working for an individual that they’ll know his first name and cell number and that’s about it,” he said. “These workers are truly employees in every sense of the word. They’re told what time to show up, what to do when they get there.”

It can involve any kind of compensation that isn’t run through a payroll account, said John Jarger, director of operations at Mid-America Carpenters Regional Council.

“We’ve actually seen some cases where employers are paying employees by things like Venmo and Visa gift cards,” he said.

This style of payment can shortchange workers if they’re injured while working or lose their job because their employers aren’t paying into certain programs, Jarger said.

“If they get hurt, workman’s compensation,” he said. “There are no payments on unemployment insurance.”

Employers also skirt contributions to Social Security and Medicare when they pay employees this way, Jarger said.

The misclassifications by employers cost Missouri, Kansas and the federal government millions of dollars in unpaid income taxes, said UMKC economics professor Michael Kelsay, who authored the studies.

“The result of employers illegally misclassifying workers as independent contractors allows them to save approximately one-third of their labor costs by not paying all these associated taxes,” he said.

Kelsay’s research finds roughly 21% of construction workers in Missouri and 36% of Kansas construction workers are affected by this kind of payroll fraud.

The studies reach this conclusion by finding the difference between the number of construction workers on payroll records aggregated by the U.S. Department of Labor and how many people report being construction workers in the American Community Survey.

The study also accounts for individuals paid “off the books” in cash who may not report that income. It does this by finding the difference between the number of construction workers noted in the Current Population Survey and those listed in the Census Bureau Nonemployer Statistics series.

Kelsay estimates the misclassifications in Missouri mean the state is losing between $9 million and $45.2 million in annual state tax revenue. Kansas may be losing more annual tax revenue, between $13.8 million and $50 million, he added. The states also lose around $100 million in contributions to state unemployment insurance and worker compensation funds.

Between the two states, the federal government may be losing out on more than $200 million in taxes, Kelsay said.

Responding to what the carpenters union calls a growing problem nationwide is challenging, Wilson said.

Many immigrant workers, both documented and undocumented, fall victim, he said, adding that some of them don’t know U.S. employment law well enough to challenge these conditions. Others, especially those who are undocumented, may fear deportation or retribution if they come forward and testify about unfair practices, he added.

“There’s a workforce that these tax cheats can take advantage of,” Wilson said. “They don’t complain, and that’s part of the problem we have with enforcement.”

Eric Schmid covers business and economic development for St. Louis Public Radio.