The Building Tradesman Newspaper

Friday, May 03, 2019

AG Nessel gives shady contractors a wake-up call on 1099 cheating

By Marty Mulcahy, Editor



LANSING - For at least the past 30 years, individual workers, labor unions and honest employers have complained about the illicit use of "1099" employees - it's the practice by shady employers of misclassifying workers who toil on a full-time basis as "independent contractors."  That saves the employer taxes, overtime charges, workers comp and health insurance costs.

On April 22, less than four months into her initial term, Michigan Attorney General Dana Nessel made cracking down on 1099 cheaters one of her first major initiatives. At a press conference she announced the formation of the AG's Payroll Fraud Enforcement Unit, which will focus on the misclassification of employees as self-employed independent contractors. 

"Payroll and tax fraud has been allowed to go on under the radar for far too long," Nessel said. "And it's a crime that robs all of us. And we're here today to say enough is enough. Nobody wants to be taken advantage of, and nobody wants to be robbed. Yet every year because of lax enforcement Michigan taxpayers and workers are robbed in plain sight when shady companies commit payroll fraud, misclassify their workers and dodge paying hundreds of millions of dollars that they owe to Michigan."

In Michigan between 2013 and 2015, an estimated $429 million in wages and overtime pay were denied workers due to misclassification, according to an Economic Policy Institute analysis. The share of "earned wages not paid" for cheated workers amounted to 27.3 percent of their earnings, the EPI reported.

The problem is particularly acute in the construction market. Labor unions in Michigan and around the country have protested the unfair, built-in advantage of nonunion employers employing full-time 1099 crews, allowing those employers to easily lower their costs and win bids on jobs because  they don't have to pay their workers the prevailing wage, nor include check-offs for workers compensation, health insurance, or a 401K /pension. 

The use of 1099s also frequently opens the door to a raft of other ways to cheat workers, and government tax coffers. The Attorney General's office further cited the EPI pointing out that “employers steal billions from workers’ paychecks each year by misclassifying workers, paying less than legally mandated minimums, failing to pay for all hours worked, stealing tips from tipped workers, and not paying overtime premiums.”

The use of "1099" cheaters refers to the number on the IRS tax form that independent contractors have to fill out on their own in order to file their taxes - basically it designates themselves as their employer for whatever job they worked. Full-time workers should get a Form 1040 from their employer. 

"These bad actors shrink paychecks and often force workers and their families to rely on social and welfare programs to make ends meet," the AG's office says. "In addition, payroll and tax fraud forces taxpayers to foot the bill for billions in lost tax revenue to the federal and state governments, and creates an unfair competition with employers who play by the rules."

The crackdown by Nessel's office will include:

*Establishing a Payroll Fraud Enforcement Unit in the Attorney General’s Office to go after the shady actors committing payroll fraud.

*Strengthening whistleblower protections to shield employees who report wrong-doing and provide incentives when they do.

*Toughening penalties against payroll fraud to make Michigan a leader in protecting workers.

Nessel bemoaned the lack of expressed Republican support, so far, for legislation addressing the anti-fraud initiative. Joining Nessel at the news conference were Michigan Senate Democratic Leader Jim Ananich, who said: “Too many Michiganders are playing by the rules and working hard, day after day, just to turn around and be cheated out of the pay they’ve earned. It’s not too much to ask that CEOs compensate their workers in full. It’s that simple. My Democratic colleagues and I are committed to standing with Michigan workers and their families in saying, enough is enough.”

Said Michigan House Democratic Leader Christine Greig: “Hard work and fairness are Michigan values, and companies that cheat their workers and on their taxes do not reflect those shared values. Cracking down on payroll fraud is a nonpartisan issue; it hurts all Michiganders. Companies that cut corners are getting a free ride off the backs of hard-working Michigan families and they are hurting legitimate businesses that follow the rules.”

To report payroll fraud, go to Michigan.gov/payrollfraud or call the payroll fraud hotline at 833-221-1099.