Contractor Shawn Campbell brought in over a dozen Spanish-speaking immigrants to help build a new apartment complex in Renton. But he didn't call them employees; they were "business partners." Because of that designation, Campbell was able to avoid over $1 million in payments to the state workers' compensation fund and keep his employees working up to 46 hours a week with no overtime, a judge found. He slid through undetected for more than two years, until a disgruntled employee blew the whistle.
It was a new twist in the ongoing battle between state regulators and shady contractors looking for a way to make tax evasion look legal on paper. The construction industry as a whole cheats the state's unemployment and injured-worker insurance systems out of about $109 million each year, according to a Washington State Institute for Public Policy report published last November.
Employers have been finding ways to game the system since the first employee-protection tax laws were created in the 1930s, says attorney David Marks, who represents workers in wage-loss cases. Most of the avoiders take one of two approaches: pay workers in cash and keep them completely off the books, or declare employees to be "independent contractors." In addition to being tax-exempt for employers, independent contractors don't qualify for overtime or workers' compensation.
Using independent contractors, or freelancers, for specific projects is legal if they're truly independent. The problem, Marks says, is when an employer requires workers to sign on as something other than employees despite the fact that they work for no one else and take all direction, in terms of hours, projects, labor, and payment, from the employer.
Campbell took the game one step further when he graciously brought his workers on as co-owners, forming a company called The Framing Group in 2002. Not only was he spared employment taxes, Campbell was legally able to take money out of his workers' paychecks for equipment and other company supplies. During that time he got a regular gig contracting with local builder Polygon Northwest to do framing work on apartment complexes in the Seattle suburbs. (Framers build the skeleton of a building—interior walls, floors, stairs, etc.)
Campbell would later claim his workers, nearly all of them speaking little or no English, were always business partners, but he had them sign contracts making the partnership official in May 2004. At least a dozen of those workers say in court filings that they were brought in and told to sign a 28-page document filled with English legalese that no one translated. "I was informed that if I did not sign the document, I could no longer continue to work for Shawn Campbell," states Franklin Vides in a translated affidavit. Vides worked for Campbell from April 2002 to March 2005.
Around that time Polygon started raising questions about the status of Campbell's "business partners," many of whom made $10 or $11 an hour while Campbell was paying himself a monthly salary of $10,000. According to court documents filed in a related lawsuit, Polygon didn't trust Campbell's arrangement, so in October 2004, Campbell again called in his workers and had them sign a document reversing the one signed in May. It was enough to make one of the employees feel like he was getting screwed, and in November 2004 he went to the state Department of Labor and Industries.
L&I launched an audit, and in February 2005 sent a bill to Campbell for $1.5 million in unpaid workers'-comp premiums. Three months later, Campbell walked off Polygon's Valley Springs apartment complex in Renton, leaving over $1 million in unpaid bills related to his work on the project, Polygon claims. In May 2005 the company filed suit against Campbell for breach of contract. Campbell's employees joined the suit, seeking overtime and reimbursement for money he took to pay for equipment.
Polygon settled its claim for an undisclosed amount, but Campbell continued to fight the workers, saying they were well aware of the nature of his business and their status as partners. Last July, King County Superior Court Judge Bruce Hilyer sided with the workers, ruling that The Framing Group was a "sham corporate shell to hide various instances of self-dealing and dubious financial and business practices that benefited only [Campbell]."
Hilyer also awarded 12 workers more than $380,000 in overtime and lost wages and another $160,000 in attorney fees and court costs.
The Public Policy Institute's report last fall on the size of the underground construction economy was done at the behest of a new legislative task force created during the 2007 session to reign in abusive contractors. This spring, two bills were signed into law which added additional L&I auditors and more clearly defined the nature of an independent contractor, making it easier to identify instances in which workers have been misclassified.
Rep. Steve Conway, D-Tacoma, who chairs the task force, says he hopes the two bills will start to chip away at the problem, but notes he's chasing a moving target as contractors dream up myriad ways to dodge government levies. "It's difficult to get the right net here to catch these butterflies," Conway says, adding that the Campbell case is the first of its kind he's heard of. The task force will continue to meet through this year, with the goal of creating additional legislation for the 2009 session to deal with the problem.
