State broadens efforts to eradicate CT's underground economy

It was around 9:30 a.m. on Oct. 20 when Resa Spaziani entered a bodega on Albany Avenue accompanied by Hartford police officers, who were on a mission that morning to inspect several small storefronts suspected of illegal activity.

The city, according to Hartford Deputy Police Chief Brian Foley, has a number of neighborhood markets that operate outside legitimate means violating liquor laws, peddling stolen goods, or even selling drugs.

Spaziani was clad in a bulletproof vest, but she's not a cop; she's a member of the state Department of Labor's Division of Wage and Workplace Standards. The city police force asked Spaziani, and her Spanish interpreter co-worker Ariel Morales, to join their inspections because she has power they lack: the ability to shut down businesses that violate state labor laws.

The strategy paid off. That morning Spaziani issued stop work orders on three separate bodegas — two on Albany Avenue and a third on Bellevue Avenue — for failing to pay wages and paying under the minimum wage. Each market was closed and faces thousands of dollars in fines.

In recent years, state labor officials have ramped up efforts to crack down on unscrupulous employers that skirt labor laws by misclassifying workers as independent contractors, not reporting workers on their payroll, or failing to pay workers' compensation insurance or minimum wage, among other violations.

Not only have the number of stop work orders increased, but inspections and fines are also up. More significantly, state labor officials have broadened their investigative scope. Traditionally, inspections were focused on the construction industry, but other businesses — ranging from restaurants, nail salons, small merchants, and even hospitals — are audited these days.

The goal, according to Gary Pechie, head of DOL's Division of Wage and Workplace Standards, is to eradicate Connecticut's underground economy, which costs the state untold millions in uncollected tax revenue each year, and creates significant competitive advantages for businesses that break the law.

“What's happening is that we are really starting to make an impact on this,” Pechie said. “We thought our efforts were mostly going to focus on construction, but it has evolved into other areas. We've been asked to go inspect places we never thought we would.”

Efforts ramp up

Connecticut's crackdown efforts ramped up about three years ago, when the state signed a pact with the U.S. Labor Department and Internal Revenue Service, to share resources and jointly go after unscrupulous employers. Since then, the state Department of Labor has forged other alliances with state agencies, including the Department of Revenue Services and Department of Energy & Environmental Protection, as well as local police departments and building inspectors, among others.

Investigators have found that if an employer is breaking one law, it most likely is skirting other laws as well. That's what spurred the recent joint investigation by the labor department and Hartford Police, which eventually led to one of the three bodegas re-opening after complying with the law.

By sharing intel and resources, Pechie said, they've been able to track and go after more law breakers.

In 2011, for example, the state issued 245 stop work orders and levied $201,150 in fines, up significantly from the 160 stop work orders and $93,400 in fines handed out a year earlier.

Since July, 1, 2013, the state has issued an additional 208 stop work orders and $301,600 in fines.

Meanwhile, in the last four years the state labor department's Unemployment Insurance Tax Division has performed 8,554 audits and discovered 16,787 workers who were misclassified as independent contractors. That accounted for $244 million in gross wages that were underreported for unemployment tax insurance purposes.

Pechie said when employers underreport their payroll or don't pay workers compensation insurance, other businesses and taxpayers are left to foot the bill if misclassified employees receive unemployment benefits or get injured on the job.

Increasingly, employers, too, are being more vigilant about labor laws, knowing that when a competitor isn't playing by the rules, they are put at competitive disadvantage. Tips from business owners are a significant portion of the nearly 5,000 complaints the state DOL handles each year, Pechie said.

More work to be done

Connecticut's efforts to eviscerate the underground economy dates back about seven years, when lawmakers gave labor officials the ability to issue to stop work orders and fine companies that violate employment laws. In Connecticut, employers face a $300 fine each day they improperly classify workers as independent contractors.

Enforcement efforts started slowly but ramped after the Great Recession, which had a dramatic impact on Connecticut's labor market.

The downturn significantly increased the number of laid-off workers who applied for unemployment benefits, and gave some employers more incentive to cut costs by cheating the system. Originally, Spaziani said, the labor department's focus was on the construction industry, where misclassification of workers as independent contractors was widespread. Lately, the bigger issue has been employers leaving workers completely off the books, so they can avoid payroll taxes.

That, along with tighter partnerships with local, state, and federal agencies and a greater volume of complaints from workers and employers alike, got DOL to broaden its investigations into more industries.

Meanwhile, the state's financial woes provided added incentive to step up enforcement efforts and get more employers on the tax rolls, legal experts say. Besides battling huge budget deficits, the state's unemployment insurance fund, which is funded by employer payroll taxes, went broke in 2009 forcing the state to borrow hundreds of millions of dollars from the federal government. That money is still being repaid and has resulted in extra levies on businesses to cover interest payments.

“Whenever the Department of Labor or Revenue Services decide they need a little extra money [increasing enforcement efforts] is sort of the low hanging fruit because people are constantly misclassifying folks,” said Hartford attorney Hugh F. Murray, III.

Murray, an employment lawyer with Murtha Cullina, said he advises his clients on a regulator basis to audit their workforce to make sure employees are properly classified.

Construction industry still a focus

The business community doesn't always take kindly to a tougher regulatory environment, but Don Shubert, president of the Connecticut Construction Industries Association, said the state's heightened labor law enforcement efforts are pro-business.

When contractors cheat the system to lower costs and win project bids, it creates an unlevel playing field for companies that play by the rules.

Shubert said he is happy with the state's added aggressiveness in recent years, but the issue of worker misclassification is far from being solved. With only four full-time employees who spend about 50 percent of their time on the issue, the state Department of Labor still doesn't have enough manpower to go after all the violators, Shubert said.

“For a lot of contractors this is still just considered the cost of doing business,” Shubert said.

Shubert points to an example earlier this year, when the state shut down construction of the Apple Store in Westfarms Mall, after an inspection found five construction workers weren't covered by workers' compensation insurance.

But the contractors and subcontractors — all from out-of-state — ignored the order and continued working because it would have been more costly for them to miss their deadline than pay a $1,000 fine for each day they defied the stop work order, said Pechie, the labor department official.

“The [contractors] flat out said 'We need to finish the work and pay the fine,'” Pechie said. “It made us think maybe our penalty isn't big enough.”

The construction industry still remains an important focus for inspectors. The recession ratcheted up competition for jobs, particularly public-sector projects where contractors are chosen based on lowest competitive bids.

Since 2009, Shubert said, there has been a race to the bottom on project bidding, which has eroded industry profits — putting many contractors out of business — and added extra incentives to shave costs.

“You have aggressive project owners who are trying to get every job out there,” Shubert said. “Many times the only way to hit that low price is to cheat.”

Dan Filomeno, owner of East Hartford drywall-interior construction contractor Acoustics Inc., said he's seen questionable bidding practices firsthand. His company, which he founded nearly 30 years ago, hoped to do work on UConn's new $32 million basketball practice facility earlier this, but their project bid came in 25 percent higher than the winning contractor.

In February, when state investigators paid a surprise visit to the construction site in Storrs, they found many of the workers hired by subcontractors Intext Building Systems of Glastonbury and East Hartford-based J&V Construction were undocumented, being paid in cash, and weren't receiving a prevailing wage, which can cost employers as much as $65 per hour, when taxes are included.

A stop work order was issued, and Acoustics was eventually brought in to perform some work on the facility, Filomeno said.

“This does happen, and it's not good for anybody,” Filomeno said. “There hasn't been a lot of work, so everyone just keeps lowering their numbers. There are no profit margins; you're lucky if you can cover overhead costs.”

Matt Capece, a representative of the general president of the United Brotherhood of Carpenters who investigates payroll fraud, said Connecticut's efforts to combat worker misclassification compares well to most other states, which are also ramping up their enforcement efforts.

One thing Connecticut should improve, however, is holding general contractors more responsible for who they hire, Capece said.

Typically, contractors are shielded from legal retribution if one of their subcontractors breaks the law, he said. “There needs to be some liability and accountability up the contractor chain,” Capece said.