Transcript: Testimony by Danny Odom on the use of independent contractors & payroll fraud – Nov. 12, 2013
Partial transcript of the verbal testimony given by Danny Odom, Vice President of Odom Construction Systems, Inc., in Knoxville, Tennessee, on the impacts of misclassifying employees as independent contractors and payroll fraud. The Senate Health, Education, Labor & Pensions subcommittee on employment and work place safety hearing was held on Nov. 12, 2013:
Chairman Casey, Ranking Member Isakson, and subcommittee members, my name is Daniel Odom, and I am the Chief Operating Officer and the Vice President of Odom Construction Systems.
I welcome the opportunity to talk to you today about how payroll fraud or misclassification is undercutting my company and crippling the construction industry. It’s with great passion I’m testifying today against this practice.
Odom Construction is a family-own and run company purchase by my father in 1982. We are primarily an interior systems contractor, meaning we do carpentry, dry wall, plastering, and ceilings. We also do masonry and we do some prefabrication of walls and tresses as well.
Almost everything we do is self-performed. We are based in Knoxville, Tennessee, and we have offices in Kentucky and Austin, Texas. We have a couple hundred employees, and in the last year we have worked on projects in Tennessee, Virginia, Kentucky, Georgia, Alabama, Texas, Michigan, Louisiana, and Florida. So we’ve seen payroll fraud in a lot of places.
Payroll fraud happens when an employee is called an independent contractor who’s sent a 1099 form. Also, employees are paid off the books – something that is extremely common in the construction industry.
In our business, it’s not hard to figure out who’s an employee. When you supply building materials, tools, and equipment, training and daily instruction and set hours of work, you have an employee. Still, people misclassify their workers because benefits can be worth the risk.
Payroll fraud is the hammer used to underbid law-abiding employers by avoiding taxes, worker compensation premiums, and overtime. It allows our competition to bid their labor cost 20% to 30% lower than those of us who play by the rules.
In construction, the value of labor can be 50% of a total project, so the cheaters compete at a level that no law-abiding contractor can reasonably touch, even by better buyout of materials or training or productivity.
Also even when caught, the cheaters often prosper. Let me give you an example.
We frequently find ourselves in competition with a contractor some say uses payroll fraud tactics through brokers that supply labor.
The Tennessee Department of Labor collected over $61,000 in unpaid unemployment contributions and interests from that contractor for three or more projects spanning many years.
Some of those projects were publicly financed. One of those projects – a new student housing for a secondary education institution in Tennessee – our bid was close to $1 million. The usual mark-up for a bid – profit and overhead to cover office salary and expenses – is around 15%. When you consider mark-up on that one job at $115,000, the $61,000 delinquency payment collected by the Tennessee Department of Labor for multiple projects was less than half the mark-up for just this one project alone.
The payment was essentially just a fine that took a small bite out of an overall profit margin. It was just a cost of doing business and arguably well worth the risk.
There were no limits placed on this contractor bidding future public work. We have competed against them many times ever since, and in most cases, they beat us.
Many states have begun the hard work of eliminating payroll fraud from the construction industry. Tennessee, for instance, enacted new law this year with business support to fight back against worker’s compensation premium fraud.
But it will take sensible comprehensive action by the federal government to put this issue to bed for a number of reasons. Not all states understand the issue. Some do understand and they’ve enacted new laws but effective enforcement is still uneven.
The federal government can look at the various state laws, find out what is working and what isn’t, make enforcement plans and pass legislation that is enforceable across all states.
One of the worst offenders we know is based out of Georgia but regularly prices work in Tennessee and elsewhere. It uses labor brokers that are sometimes based out of Florida. So in the end, there are three states involved on a single project for just this one contractor.
Interstate regulation is a federal function and it applies to this problem. U.S. Attorneys could help by prosecuting egregious cross-border offenders. Also, the federal government already has e-Verify employees, and it too can be part of the sensible solution.
The bad news for us is that violating the law has become an established business plan. Today, the profitability of breaking the law, fueled by reduced opportunities due to the recession, creates the danger of phasing out law-abiding businesses until there’s nothing left but the bad operators.
This has also resulted in trades people leaving the industry en masse to seek employment in safer industries with wages that haven’t beaten into the ground by criminal operators.
We can’t let that continue.
Payroll fraud is shutting down a whole industry of contractors that believe in building middle-class jobs and making a reasonable profit by doing things the right way. Businesses like ours deserve your protection.
- WhatTheFolly.com: Transcript: Remarks by Sen. Bob Casey on the use of independent contractors & payroll fraud – Nov. 12, 2013
- WhatTheFolly.com: Transcript: Remarks by Sen. Johnny Isakson on the use of independent contractors & payroll fraud – Nov. 12, 2013
- WhatTheFolly.com: Transcript: Testimony by Matt Anderson on the use of independent contractors & payroll fraud – Nov. 12, 2013
- WhatTheFolly.com: Transcript: Testimony by Danny Odom on the use of independent contractors & payroll fraud – Nov. 12, 2013
- WhatTheFolly.com: Transcript: Testimony by Cathy Ruckelshaus on the use of independent contractors & payroll fraud – Nov. 12, 2013
- WhatTheFolly.com: Transcript: Testimony by Chris MacKrell on the use of independent contractors & payroll fraud – Nov. 12, 2013
- WhatTheFolly.com: Transcript: Q&A w/ Sen. Al Franken on the use of independent contractors & payroll fraud – Nov. 12, 2013
- WhatTheFolly.com: Transcript: Q&A w/ Sen. Johnny Isakson on the use of independent contractors & payroll fraud – Nov. 12, 2013
- WhatTheFolly.com: Transcript: Q&A w/ Sen. Bob Casey on the use of independent contractors & payroll fraud – Nov. 12, 2013
- Senate Health, Education, Labor & Pensions Committee: Subcommittee Hearing – Payroll Fraud: Targeting Bad Actors Hurting Workers and Businesses – Nov. 12, 2013
- Treasury Inspector General for Tax Administration: Employers Do Not Always Follow Internal Revenue Service Worker Determination Rulings – June 2013