Construction workers build a structure in Katy, Texas, on April 2, 2025. (Photo by RONALDO SCHEMIDT/AFP via Getty Images)
Share
This article is a joint publication of Workday Magazine and The American Prospect.
In 2020, Alejandro was working a construction job in the Madison, Wisconsin, metro area, doing texture, painting, and drywall on residential homes, when his boss asked him to do something strange. The boss gave Alejandro a check, and told him to go to a local bakery to cash it. He was then instructed to use that cash to pay himself and his co-worker for their labor. Alejandro, who arrived in the U.S. from Mexico in 2019 and is now 29, was unfamiliar with employment practices in this country and did as he was told, paying himself $800 every two weeks. He cashed the checks even though they were made out to someone else’s name.
Alejandro is going by a pseudonym to protect himself from retaliation, and he also requested I not name his former employer, to avoid any chance that his own identity could be revealed. The hours at the former employer were long—around 50 a week—and the wages were low. “They didn’t have a set schedule,” he explained through an interpreter. “It was random. They would sometimes pick me up at six, sometimes at five, and I would sometimes get back at six or seven.”
Alejandro continued to cash the checks at the bakery and distribute the money every two weeks, while sending as much of his own pay as he could back to Mexico for his wife, so she could buy food and diapers for their daughter. After a few months, the intense work began to wear on him. Then one of the checks bounced.
He has held onto that bounced check ever since, and showed it to me over our Zoom call—the last physical remnant of his victimization by a misclassification scheme.
Misclassification and paying off the books is rampant throughout the construction industry, where about 9 out of 10 workers in the private sector are not members of unions, and bosses frequently exploit an immigrant workforce that is far less likely to report wage theft, labor trafficking, and other wrongdoing. According to the Century Foundation, in 2021, between 10 and 19 percent of the construction industry workforce in the United States was either misclassified or “working in the underground economy.”
But misclassifying workers or paying them under the table can be risky for employers: 1099 reporting and bank records can be tracked. So the industry has developed elaborate systems to continue denying workers their rightful pay and benefits—and shield the specialty contractors that do the work on job sites, along with players all the way up the contracting chain, including construction owners and general contractors.
The word “fraud” may sound hyperbolic in describing private-sector construction, but in August of 2023, the Financial Crimes Enforcement Network, a bureau within the U.S. Treasury Department, issued a notice about “a concerning increase in state and federal payroll tax evasion and workers’ compensation insurance fraud in the U.S. residential and commercial real estate construction industries.” Yet those at the top of the contracting chain are almost never held responsible, and workers like Alejandro remain vulnerable to abuse.
Key beneficiaries of this scheme are what are known as specialty contractors, who typically do the actual work on a job site, like painting and flooring. They bid for jobs from construction owners, construction managers, or general contractors. Competition for contracts is fierce, and one thing specialty contractors can do to get an advantage is to bid low. But that means that, in order to make money, they need to drive down their own costs.
In construction, many of the costs are fixed, like materials. But labor costs are more malleable. Employers often pay low wages and deny benefits, or in many documented cases, steal wages.
But there is another big cost associated with labor that can be driven down: employment taxes, workers’ compensation insurance premiums, unemployment insurance, and overtime premium pay—in other words, the customary costs associated with being an employer. These costs can be entirely eradicated if workers are misclassified as independent contractors, rather than employees, or simply paid off the books.
When workers are misclassified, it means they are denied a host of protections and rights that workers are entitled to. They don’t get workers’ compensation if they are injured on the job; they are not eligible for unemployment benefits if they are laid off through no fault of their own; they don’t get key protections against racial or sexual harassment; they can’t form a union; and they don’t have protections for organizing activity, just to name a few.
Workers can challenge their misclassification, and then reclaim these rights. But in some cases, workers don’t even discover the implications of misclassification until they get injured on the job, and then realize that they have to pay for their own care. This happened in 2022 to Minnesota construction worker José Alfredo Gómez, after he fell two stories from a house he was working on, leaving a bone protruding from his pelvis. With the help of the workers’ center Centro De Trabajadores Unidos En La Lucha (CTUL) and a labor lawyer, he was able to eventually get workers’ compensation, but not everyone in his position has access to this kind of support.
Specialty subcontractors who don’t want to get caught misclassifying their workers often rely on labor brokers, who provide labor for a job, pay the workers, and oftentimes either supervise them or co-supervise with the specialty subcontractor.
“Labor brokers can come in many different shapes and sizes,” explains Matthew Capece, representative of the general president of the United Brotherhood of Carpenters and Joiners of America. Capece has been researching this issue since 1989, shared research and white papers with me, and made himself available for multiple interviews. “Much of the time it’s a guy or a gal with a cellphone, and they know workers, and they know contractors. They have a relationship with a specialty contractor, say a floor covering contractor, and when that contractor needs labor, they will reach out to the labor broker for the bulk of their workforce.”
Alejandro’s boss was a labor broker. By having Alejandro cash the checks under another person’s name, the labor broker could claim that the person the checks were written to was a subcontractor tasked with paying workers, and therefore personally responsible for any employer taxes and insurance. If the authorities or the IRS came looking, the labor broker could point his finger at this alleged subcontractor, and the specialty contractors the boss did business with were also cushioned from responsibility.
“Say I’m a specialty contractor or a labor broker, and I want to pay these workers,” Capece said. “I’ll bring in a worker and say, ‘How about I make you a company, and I just write the checks to you.’ That company the workers are getting paid through is like a shell company.”
Several months of difficult work, followed by a check bouncing, were too much for Alejandro. He decided to move to California, in hopes that he would find better work. “It was a pretty rough time. I felt like I was being abused and taken advantage of, and the pandemic was a rough time,” says Alejandro. To send enough money back to his wife, he says, “I had to borrow money from my brother. When I left for California, I was in debt to my brother.”
Fortunately for Alejandro, his name was not on the checks, so he was able to get out of the situation without too much damage, beyond the immediate financial hardship of having to pick up and leave.
But Alejandro’s brother was not so lucky. The brother did not want to be interviewed for this article, because he found the situation so dispiriting, but he gave me permission to tell his story, which was recounted by Alejandro. (Two Madison-based staffers for the North Central States Regional Council of Carpenters corroborated the details.)
From 2017 to 2018, the brother was working for a different labor broker who would use him like a foreman. He had a crew, and would move them in a van or truck to worksites. The brother was paid $80 a day, regardless of how much work he did, but then the labor broker told him he could make $120 a day if he formed an LLC.
The labor broker would pay him with a check. He’d cash it out, pay some of the workers, and give the rest back to the labor broker. The brother thought the labor broker was helping him out, and didn’t realize he was being classified as a subcontractor, even though he did not meet the most basic conditions, like maintenance of a separate business, or making profits or losses from subcontracting work.
At one point in 2018, the labor broker employed between 40 and 50 workers on a project doing drywall installation and finishing, and the brother was given more than $120,000 to disburse to the crew.
The brother brought his family to the Madison area from Mexico, and started the process of applying for citizenship. But when he went to file taxes, he discovered he owed around $18,000 to the IRS. At one point, his wages were garnished. The brother has four kids and a wife, and had considered the labor broker a friend. “They lived together and everything,” explained Alejandro, but when the brother found out he owed money for taxes, the labor broker “didn’t answer his phone calls anymore,” says Alejandro.
According to Apolonio Duran, who works for the North Central States Regional Council of Carpenters, this kind of scheme is common. “One labor broker might do this to 30 or 40 people,” he said.
Some efforts are even more elaborate. In another common scheme, a labor broker rents an LLC or incorporation identity from a “facilitator,” but that labor broker is not named as a principal of the company. Through the facilitator, this LLC or Inc. then gets in touch with an insurance broker, who provides a certificate of insurance, which specialty subcontractors require to do business.
However, the shell company only purchases enough insurance to cover a small fraction of workers on the job, or it will buy “what-if” policies, where they declare no payroll but have a workers’ compensation policy. (These what-if policies exist for businesspeople who may hire someone in the future and want to make sure they are covered.)
Under this scheme, general contractors, construction managers, owners, and specialty contractors are protected, since it looks like they are working with a legitimate subcontractor, and following laws and regulations. One shell company identity may be rented to numerous labor brokers at once, and insurance brokers often look the other way, even though this practice is widespread.
In March 2021, two men, Gregorio Jose Fuentes-Zelaya and Dennis Alexander Barahona, pleaded guilty to running one such scheme in Florida. According to a statement from the United States Attorney’s Office in the Middle District of Florida, the scheme allowed the shell companies and contractors to avoid their portion of payroll taxes, and neither reported the wages they paid out.
A few months after they pleaded guilty, Fuentes-Zelaya was sentenced to 33 months in federal prison, and in Barahona was given a sentence of 18 months.
Such cases go beyond Florida. In October 2020, LeRoy Mehr and Joyce Mehr, the husband-and-wife owners and operators of Merit Drywall in Minnesota, pleaded guilty to a similar scheme, and soon after were sentenced to 180 days of home monitoring. The Minnesota Commerce Fraud Bureau determined that the couple “deliberately misclassified employees as independent contractors, set up shell companies for the employees, and misrepresented the employment relationship to their insurance company.”
Capece says he has personal knowledge of workers being victimized not just in small, residential projects, but in the construction of military bases, universities, and hospitals, and in projects overseen by big-name construction managers and general contractors.
A 2019 study by the attorney general for the District of Columbia found that “employers committing payroll fraud rarely pass on the cost savings from misclassification, like the cost of providing employee healthcare, to their workers.” Savings for bosses can be significant. If construction employers “keep all the money they did not pay in fringe benefits for themselves, they can evade up to 48.1 percent of their costs,” the study notes.
Such practices are widely known throughout the industry, yet efforts to crack down rarely go up the contracting chain, and the developers on top are often left untouched. CTUL, the workers’ center, is trying to change that with the Building Dignity and Respect Standards Council, a worker-led program in Minnesota that aims to stop abuse throughout the industry, and hold developers accountable for mistreatment throughout the contracting chain.
The fact that sketchy labor broker schemes are so commonplace puts employers who don’t engage in these practices at a competitive disadvantage, says Capece. Union workplaces are not perfect either, but collective-bargaining agreements offer a layer of protection against the worst abuses.
Where workers are getting misclassified, they are more vulnerable to other forms of abuse, because they do not get worker protections, and because their employment operates in the shadows. A March 2021 report from the New Mexico Advisory Committee to the U.S. Commission on Civil Rights states that “the construction industry sees a high concentration of wage theft. The industries’ reliance on subcontractors and labor brokers allows many employers to deny responsibility for ensuring fair wages.”
Construction is one of the most dangerous industries in the United States, and it is also huge, employing around 1 in 16 U.S. workers. Yet these workers are left vulnerable. The UC Berkeley Labor Center found in a January 2022 report that 39 percent of families of construction workers are enrolled in at least one safety net program, and “three times as many construction workers as all workers lack health insurance.”
Everyone interviewed for this piece emphasized that the Trump administration’s crackdown on immigrants is guaranteed to make these conditions decline even further. “Right now immigrant workers are even more fearful, which means they will be even more easily exploited,” says Capece. “It’s going to make things worse.”
Alejandro’s fortunes had nowhere to go but up. While he was in California, his truck was stolen, so his brother drove all the way out there, picked him up, and brought him back to the Madison area. There he got a job with a union contractor, and became a member of North Central States Regional Council of Carpenters Local 314. Since becoming a union member, he has made better wages, and was even able to bring over his family, which has since expanded to four kids, including a two-week-old baby. When he has free time, he says, “I like to spend it with my family.”
But he feels bad about the plight of his brother, who is still paying off his debt to the IRS, while attempting to provide for his own four children, says Alejandro. “It’s still affecting my brother. It’s still financially challenging.”