Arizona Firms Face Probe Into Labor Practices Use of Subcontractors to Draw Federal Scrutiny

By Jahna Berry, Arizona Republic

Federal officials plan to crack down on Arizona businesses that illegally use subcontractors and who pay workers with cash, a Department of Labor official told an industry group on Tuesday.

In Arizona’s recession-ravaged construction industry, the practice has become rampant, business owners say, because desperate firms are willing to skirt the law in an effort to make the lowest bid for scarce projects. 

Breaking labor rules hurts cash-strapped governments and creates an uneven playing field for honest businesses, regulators say. 

The stepped-up enforcement is part of a national effort, said Eric Murray, district director for the Department of Labor’s Wage and Hour Division. Murray spoke to a crowd of 100 at a meeting of the American Subcontractors Association of Arizona, Inc. 

Murray would not specify how many businesses would be probed. The investigations should begin this year, and they will be high-profile, the official said. “(They) will make a statement,” he said. 

In an interview, Murray said, “Offices around the country are taking a look at what’s in their backyard.”

The issue comes up when a contractor – for example, a homebuilder – assigns tasks to subcontractors, such as plumbers and roofers. Sometimes, those specialists use crews of workers who they claim are independent contractors, not employees. 

If companies use independent contractors, the companies can avoid expenses including taxes and workers’-compensation insurance. They also don’t check laborers’ eligibility to work in the U.S. with
E-Verify. 

Often, these workers are subcontractors on paper, but they aren’t true independent business owners – they are essentially employees. 

In addition, more firms are also paying workers in cash so they can pay lower wages, avoid taxes and skirt labor laws. 

Randy Shipp, owner of Glendale’s United Construction Group, estimates that as many as 40 percent of local framing contractors are using illegal subcontractors or other tactics to win contracts because framing is one of the biggest expenses in homebuilding. 

“I can’t compete against these guys,” Shipp said, adding that the illegal tactics allow competitors to lower bids by as much as 20 percent. “It’s the worst that I have seen it in a long time.” 

“Businesses may save some money by breaking the law, but if they get caught, the fines and expenses can be huge,” said Julie Pace, a Phoenix employment lawyer. 

“Businesses often are forced to pay two years or more of back wages to workers, as well as back taxes. They must pay for legal expenses and risk being sued,” she said. 

Article reprinted from The Arizona Republic, April 27, 2011. The coverage of the story was a result of the reporter attendance at the April 26 Residential Construction Forum, Critical Industry Issues Update. Hosted by Climatec and sponsored by Lifestyles Media Group, LLC, Gilbert Plumbing Co., Alliance Lumber.

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