Federal case sheds light on payroll fraud, wage theft and worker misclassification

A Wisconsin drywall contractor was sentenced to 18 months in federal prison last month on charges of ripping off state and federal taxpayers to the tune of more than a half-million dollars.

The case in federal court was a rarity — the first big prosecution in the state of a construction labor broker for payroll fraud, according to Robb Kahl, executive director of the Construction Business Group, a joint labor-management organization that represents the interests of unions and contractors in monitoring the Wisconsin construction marketplace.

That’s despite what Kahl and other construction labor experts say is the widespread occurrence of the crimes that led to the man’s conviction.

“Unfortunately in construction it’s quite common,” Kahl says. “We’re pleased [by the prosecution] but it’s just the tip of the iceberg.”

Dane County drywall contractor Gustavo Reyes pleaded guilty in federal court in Madison in May to a charge of failing to pay $557,907 in back taxes. On Aug. 18 he was sentenced to 18 months in prison and ordered to pay the money. 

There are also 20 liens for a total of $2.3 million against Reyes or his businesses, operating under several different names, for failure to pay state income taxes and unemployment insurance premiums, according to the Construction Business Group.

Over the years in which he was operating, going back a decade, there were “likely many dozens of employees” working for Reyes, says Kahl, “but there really is no way for us to know for certain.”

More than bureaucratic rules

Worker misclassification — labeling workers as independent contractors when they are employees and entitled to numerous state and federal protections — is more than just a matter of following bureaucratic rules. 

Business operators who misclassify the workers they hire as independent contractors cheat the state and federal governments on taxes, Kahl says. They also cheat unsuspecting workers.  

In addition to fostering tax fraud, “misclassification is a front for wage theft, unsafe working conditions, lack of health care [and] worker’s comp — all sorts of other things,” says Rebecca Meier-Rao, executive director of Worker Justice Wisconsin. The nonprofit helps workers who don’t have union representation learn about and assert their rights on the job.

“Is this the tip of the iceberg? 100% yes,” Meier-Rao says.

Worker Justice Wisconsin took a report in 2019 from four construction workers who had gone unpaid, she says. The reports were referred to the Construction Business Group, and one of the cases became part of the federal investigation that led to the charges against Reyes.

Misclassified workers risk not being covered by worker’s compensation or unemployment insurance. “There’s nothing put in their Social Security,” Kahl says.

Kahl estimates that by not covering taxes or insurance, the cheaters can gain a 30% advantage in the bidding process, underbidding competitors who are following the law. “A lot of people are getting very rich on this business model on the backs of the workers and to the detriment of law-abiding contractors,” he says.

On most construction projects the general contractor will farm out some of the tasks to subcontractors, and Kahl says the subcontractors are usually where the shady practices appear. He believes that the general contractors and their project managers can do more to vet subcontractors. “Some responsibility has to fall on them,” he says.

Wage theft

Besides payroll fraud, the subcontractors who work in this shadow side of the business often commit wage theft. Meier-Rao says Worker Justice Wisconsin regularly gets complaints of wage theft from workers and has helped people recover more than $100,000 a year.

Typically in such cases, workers are promised pay when the job is over, almost always in cash, then stiffed by the business that hired them.

In some instances, Worker Justice assists workers in going to the Department of Workforce Development (DWD) to file a complaint. 

DWD communications director John Dipko says that the state Equal Rights Division investigates five to 10 complaints a month that involve worker classification problems. In the unemployment insurance division, audits in 2022 turned up 6,295 workers who had been misclassified, and the department assessed $1.06 million in unpaid unemployment insurance taxes along with $128,000 in interest, Dipko says. 

That division also worked with the Internal Revenue Service in the Reyes investigation, he adds.

In his first term, Gov. Tony Evers appointed a task force to delve into worker misclassification and the connected issues of payroll fraud and wage theft. The group issued two reports, the most recent one in 2022.

Under a $6.8 million federal grant DWD received last year the agency is expanding its outreach and education about worker misclassification. The department has also added three unemployment insurance investigators assigned to the agency’s worker classification section.

Confronting the employer

Meier-Rao says that going to DWD isn’t the only option. Sometimes Worker Justice staff will go with workers straight to the employer. “We will collaborate with [the workers bringing a complaint] and their coworkers to pressure the employer to pay up,” Meier-Rao says.

Worker Justice also hears from workers who have been injured on the job but denied worker’s compensation because they’ve been misclassified as independent contractors — self-employed — instead of as workers.

“The people that are targeted for this practice are immigrant workers,” says Meier-Rao — Latino immigrants in particular, she adds. Shady contractors “take advantage of the fact that they’re new to the system.”

Some may be nervous about pursuing legal help if they’re undocumented, but “even a more basic reason is that they have no idea that this subcontracting system is even in place,” says Robert Christl, Worker Justice Wisconsin’s program director. 

“Even if you’re undocumented you still have the full rights as most workers,” Christl says. Because they lack information and are accustomed to living precariously, however, they often don’t realize “that they can do something.”

Meier-Rao says Worker Justice has hired a staff member “to organize workers around this issue, so when somebody comes with a class of misclassification or wage theft, the first thing we do is talk about how prevalent it is and why it happened.”

The organization is also focusing on developers, where big construction projects begin, prodding them “so there’s actual standards of how the work is going to be done, how workers are going to get paid, and basically guarding against misclassification and wage theft,” Meier-Rao says.

If the Reyes case signals that state and federal authorities are going to pursue misclassification, payroll fraud and wage theft more aggressively, Kahl and Meier-Rao say there will be no shortage of cases to find.

“There’s plenty of other bad actors,” Kahl says. “Mr. Reyes has already been replaced by another labor broker.”