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Immigration Reform and the Shadow Economy

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The following is excerpted from an article by Ulf Wolf, which was originally published in Construction Dimensions, a monthly publication by the Association of the Wall and Ceiling Industry.  Reprinted with permission.

You find yourself underbid by 30 percent.

The contractor in question swears on a stack of Bibles that all of his labor is legal and documented and that he, as required by law, pays payroll tax and workers’ comp for all of his crew just like everybody else (all the while his nose grows faster and longer than Pinocchio’s ever did).

Meanwhile, the general contractor has a complicated job to get done and may be unaware of any violations on his job site (or he may look the other way) while the owner – well, the owner doesn’t really want to be bothered with “details.”

The truth is that the underbidding (and often winning) contractor has deployed a labor broker or a sub-sub who, while claiming to be on the up-and-up, has designated all of his labor – most of them undocumented foreign nationals – as independent contractors and has put the onus on them to pay tax and insurance.  This labor broker deals in cash only, pays well below the going hourly rate, and doesn’t pay overtime.  After all, who’ll complain when a complaint might see you fired, or worse – deported?  No, his underpaid crew doesn’t want to rock any boats.  And so, he wins the bid and the underground cash labor market grows, while the law-abiding, ethical contractors fight for survival, even in a reviving economy.

How on earth did it come to this?

A Brief History

  • Our current immigration law – the Immigration Reform and Control Act – was enacted by Congress on Nov. 6, 1986:
     
  • It requires employers to attest to their employees’ immigration status.
     
  • It makes it illegal to knowingly hire or recruit illegal immigrants.
     
  • It legalizes certain seasonal agricultural illegal immigrants.
     
  • And it also legalized all existing (as of November 1986) illegal immigrants who had entered the United States before Jan. 1, 1982, and had resided there continuously since then.  Candidates were required to prove that they were not guilty of crimes, that they were in the country before Jan. 1, 1982, and that they possessed minimal knowledge about U.S. history, government and the English language.

While many applaud that the Reagan Administration, in effect, issued an amnesty for existing illegal immigrants, they also lament that the 1986 Act provides no workable path to legal status for those who were to follow, i.e., for the estimated 30 million foreign nationals who have entered the United States illegally since 1986.

Stan Marek, chief executive officer at Marek Brothers in Texas, who is deeply committed to immigration reform and who battles today’s lack of workable immigration law on a daily basis, elaborates:

“Some left after a few years, but most stayed, put down roots and tried to assimilate into their communities.

“After the terrorist attacks of 9/11, the Immigration and Naturalization Service was replaced by the Department of Homeland Security, and enforcement became more of a concern for those living here without legal status.

“The point that almost everyone misses is that there has never been a way, under current law, for these millions of people to acquire legal status.  That’s why it is so frustrating to hear people repeatedly ask, ‘Why don’t they just become legal?’  They can’t.”

It’s one thing to outlaw the employment of illegal aliens, it’s quite another to enforce it.

Enter Form I-9.

The IRCA requires employers to verify that newly hired employees present “facially valid” documentation verifying the employee’s identity and legal authorization to accept employment in the United States.

The I-9 form, or more properly the Employment Eligibility Verification Form, was provided by the federal government for that purpose and by law, every employee hired after Nov. 6, 1986, must complete this form at the time of hire.

Adds Marek, “Those in our industry who followed the letter of the law did not anticipate that these workers – who provided both picture ID and a Social Security card – might not be authorized to work here.  In fact, it wasn't until 2008, when DHS started offering E-Verification, that employers even had a way to check the validity of the documents presented at hire.”

Enter E-Verify.

E-Verify is an Internet-based, free program run by the United States government that compares information from employee’s Form I-9 to data in U.S. government records.  If the information matches, that employee is eligible to work in the United States.  However, should there be a mismatch, E-Verify alerts the employer.  While the employee is allowed to work while he or she resolves the problem, he or she must contact the appropriate agency to resolve the mismatch within eight federal government work days from the referral date.

Needless to say, it was still up to the employer to act on any mismatch detected through E-Verify, and government oversight and enforcement was, initially, cursory at best.

Marek adds, “When President George W. Bush was in office, Homeland Security conducted a few strategically placed raids to gain the attention of employers and garner support for an immigration bill that, in the end, never came about.

“Under President Obama, however, the tactics changed and DHS started the practice of I-9 audits.  Agents would visit businesses to see the I-9s for every employee.  They would check Social Security numbers, and when problems arose, the government would give the employer a certain number of days to either have the employee provide proper documentation or be terminated.

“Let’s be clear: The government only demanded that these workers be fired, not that they be deported – even though DHS knew they were not eligible to be in the United States.

“Since they were kicked out of their jobs but not out of the country, those workers – in order to survive – sooner or later found their way into the shadowy cash economy, working as independent contractors for labor brokers or sub-subcontractors who still make sizeable profits by skirting payroll taxes, overtime pay, safety training and accident insurance.”

Marek says, “Even though thousands of companies across the country have undergone such audits, I believe the construction industry has seen the brunt of it.”

The Shadow Economy

By current estimate, 11 million workers are in the United States (many with construction jobs) who would fail an E-Verify check or a DHS I-9 audit.  Many of these take their chances and hope they won’t be caught.  Many others, however, play it safer and become independent contractors in the shadow economy of 1099s.

However, whether working for an unscrupulous sub-sub or a labor broker is safer than chancing an audit is debatable.  As a rule, the labor broker or sub-sub does not offer a competitive wage, does not compensate for overtime, pays no payroll tax, draws no Social Security deductions, pays no workers’ compensation, and deals only in cash.  At the end of the job, what the worker receives, at best, is a 1099, detailing cash received.  It’s up to the worker to take care of the tax details.

Should he be injured on the job, it’s off to the hospital emergency room to be treated as an indigent, if treated at all.  Should he wish to complain, there’s always the threat of deportation to be wielded by the sub-sub or broker.  Not very safe.

Adds Marek, “This is the new and rising norm in our industry – to avoid the risk of I-9 audits and to limit hourly payrolls that require documentation by hiring a sub-sub or labor broker who supposedly pays the men and follows the laws.

“Even if a DHS audit should hit the site, the sub-sub is rarely caught for two reasons.  First, the DHS, as a rule, only audits the contractors of record, which does not include the sub-sub.  Second, should the DHS auditor scrutinize the sub-sub, these auditors normally focus on payroll records and not on payables, which is where the sub-subs hide their crews.

“The standard practice has been for every job or project to have a contractor of record who is responsible for permits, inspections, etc.  That company or individual, in turn, hires subcontractors to perform the bulk of the work.  In years past, that subcontracting company or individual would hire hourly employees to do the job, pay payroll taxes, etc.

“Today, that subcontractor or individual of record will hire another company or individual and re-sub the work to him.  The responsibility of taxes, accident insurance, overtime and safety training is pushed ‘down the line.’  This practice fits those who are willing to exploit the undocumented like a glove.

“In this case, the general contractor and subcontractor of record have taken themselves out of the liability trail at prices that no ethical and law-abiding contractor can compete with.”

Charles Antone, consultant at Building Enclosure Science in Rhode Island, spent a few years in Florida as a foreman, and has seen the shadow economy up close.  He says:

“When I worked there, the illegal community of Cuban nationals and others made for a community of second-class citizens who fared not much better than slaves – a humanitarian disaster where they were burned through like commodities by unscrupulous contractors, without legal protection and without rights.

“A general contractor, or his sub, would engage a labor sub-contractor who would show you his insurance certificate to prove that he’s legitimate – only the certificate doesn’t specify your company classification.  It often turned out that these labor subs would apply for and obtain an insurance policy as an office cleaner – a lot less expensive than construction – and would only list three people for workers’ comp coverage, then add another 27 cash-only, uninsured, underpaid, undocumented workers to the crew for the job.

“And don’t even talk about safety on these sites.  Walking a job, I would often see the drywall tapers balancing on stacks of buckets rather than using scaffolding.

“At the end of the day, however, nobody seemed to complain.  The shadow crews still make more money than at home, while the contractor saw a 35 percent profit margin.  But the human cost is tremendous.  Modern serfdom.”

Shadow Quality.  There’s another downside to the shadow contractors.  Since these contractors focus primarily on quick financial reward, quality tends to suffer.

Immigration Reform

Considering the current situation, both from a human as well as economic standpoint, it grows abundantly clear that the 1986 Immigration Act needs a major overhaul.  In fact, it has been overhauled.

In the spring of 2013, a bipartisan group of eight senators drafted a bill that both parties recognized as a much-needed reform of our country’s immigration laws.  In July 2013, this bill, now named the Border Security, Economic Opportunity and Immigration Modernization Act of 2013, S.744, was passed by the United States Senate.  This bill would, once enacted by the House and signed into law by the president, comprise the largest-scale overhaul of the U.S. immigration system in more than 25 years.  Significantly, the bill would provide a road to U.S. citizenship for perhaps as many as 11 million unauthorized immigrants, allocate billions for militarization of the southern border, and restructure the family immigration system.  The bill also would create stringent enforcement and deportation measures, and it would ramp up workplace enforcement by mandating that employers use the electronic employment eligibility verification system (E-Verify).

Salient Features of S.744. When, and if, passed, S.744 would accomplish the following:

  • Adopt a points-based immigration system, like the United Kingdom and Canada.  This will allow acceptance of immigrants according to a merit-based system based on professional skills, family relations and work history in the United States.
     
  • Create stronger border security and law enforcement.
     
  • Remove the per country green card quota limits, which would help in reducing the long backlogs.
     
  • Create a new INVEST visa that would allow prospective foreign entrepreneurs to stay in the United States and start companies easily (under current law, it is extremely difficult to do so).
     
  • Create a W visa to allow low-skilled temporary workers.
     
  • Replace the H-2A visa program for agricultural workers with a new “blue card” for immigrants.

According to a February 2014 article in The Washington Post, the Nevada press reported that Senator Dean Heller, one of 14 Republicans to vote for comprehensive immigration reform in the U.S. Senate, predicted that should the bill see a final vote on the House floor today, immigration reform would pass the U.S. House of Representatives.

That would be nice, but it would also require the standards of a perfect world.  As with all politics and major group decisions, hurdles will remain as election days approach.  Still, the fact that immigration reform appears to be being discussed by the right people gives hope that the situation will be resolved sooner rather than later so that America’s drywallers can get back to work with a full, legitimate crew.

You can read the entire article in AWCI’s Construction Dimensions.

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