BENEFITS FRAUD ON PREVAILING WAGE JOBS

Apprenticeship, Health and Welfare, and Pension

Federal, King County, Drywall

1996 -- 20%

$23.00

$5.71

Wages Benefits

2006 -- 30%

$12.23

$28.06

Wages Benefits

Federal, King County—WA 1996 - 2006

35%

78%

31%

68%

30%

71%

14%

106%

0%

20%

40%

60%

80%

100%

120%

Carpenters Electrician Laborer Boilermaker

Wage Increase Benefits Increase

California, SF County, Bricklayers

2001 -- 25%

$29.45

$9.75

Wages Benefits

2006 -- 37%

$18.45

$31.50

Wages Benefits

California, SF County, 2001 - 2006

5%

36%

8%

38%

11%

42%

7%

89%

0%

20%

40%

60%

80%

100%

Sheetmetal Electrician SprinklerFitter

Bricklayer

Wage Increase Benefits Increase

Rochester U.S. DOL 2007-08 Building Rates

Insulator: $25.41 wage and $14.66 benefits Bricklayer: $26.09 wage and $15.41 benefits Electrician: $29.10 wage and $15.82 benefits Sheet Metal: $28.28 wage and $15.86 benefits Ironworker: $24.55 wage and $17.84 benefits Operator: $26.67 wage and $18.28 benefits

New York City U.S. DOL 2007-08 Building Rates

Laborer: $34.89 wage and $22.61 benefits Insulator: $46.86 wage and $26.97 benefits Plumber: $46.15 wage and $29.65 benefits Electrician: $46.00 wage and $34.18 benefits Sheet Metal: $43.69 wage and $34.69 benefits Ironworker: $38.65 wage and $49.26 benefits

Nonunion Benefit Plan Prevalence

Over half of nonunion construction companies with over 25 employees provide a health plan

About 40% of nonunion construction companies with over 25 employees provide a pension plan

Construction companies in states with prevailing wage laws are 20% more likely to provide health plans and 80% more likely to provide pension plans.

Three Areas of Potential Violations

Prevailing wage laws ERISA laws IRS laws

Prevailing Wage Laws

Annualization Reasonably Related

Annualization

Applies to all benefit contributions, H&W, Pension, Apprenticeship, Vacation/sick/holiday

– Defined contribution plans have an exemption from the U.S. Department of Labor but not from the NYS DOL

Purpose: prevailing wage jobs don’t pay for all of workers’ benefits

– Only the hourly cost of the benefit cost, calculated over a full year, can be deducted from a worker’s check

Results: equal benefit contributions must be made on private as well as public work

Annualization Done Right

Health care premiums for the worker costs $6,240 a year.

$6,240, divided by the 2,080** work hours in the year, equals $3.00 an hour.

The suggested wage determination for health care is $6 an hour.

This contractor takes a $3.00 health care fringe credit---and pays the worker an additional $3.00 an hour in wages.

Annualization Done Wrong

Joe works for Scuzzy Contractors; 1,040 hours on prevailing wage jobs and 1,040 hours on private jobs

On prevailing wage jobs, the contractor takes the full $6 an hour credit in the wage determination for health care, contributing $6,240 to the health plan

Joe gets coverage from same plan while working on private jobs with no contributions by the contractor.

This worker is owed $3,140, plus interest, for this year alone; and the contractor faces fines and possible disbarment .

Suit Kote Construction

Both 2006 benefit plan reports were filed with the U.S. DOL with an outside auditor’s report.

Estimates show the company spent $5.18 per hour on fringes. – $3.21 for health care– 88 cents for vacation– $1.01 for pension

2007 certified payrolls claim an hourly fringe credit of $12.35 to $18.65 an hour.

Annualization Scams

Contributions only made on public work, or the contributions are higher on public work

Workers with different contributions on public projects get the same benefits.

Contributions cover benefits for workers who performed no public work

The employer takes credit for premium payments made by the employee.

Employer claims credit for health premiums on overtime hours.

Annualization Law

Required by U.S. Department of Labor Endorsed by Miree Construction Corp. v. Dole, 930

F.2d 1536 (11th Cir. 1991) Rejected unless DOL shows that benefits not

received from other plan for private work: Mistick v. Reich, 54 F.3d 900 (D.C. Cir. 1995)

Many states are modeled on federal law but could also officially adopt the interpretation

Some states have improved– E.g., New York (HMI, Chesterfield) and Ohio

New York Laws

No Annualization Exemption--ever!– Rarely enforced to date

Criminal time for prevailing wage fraud– NY Supreme Court oked Jan 29, 2008

Second prevailing wage violation in five years, disgorge all profits from the job

– SB 6519 signed on Feb. 6, 2008

Failure to submit payrolls is now a felony– SB 6519 signed on Feb. 6, 2008

No private right of action.

Defined Contribution Exemption

The Law—500 hours service requirement Examples of violations

– Excessive Service requirements– Vesting– Forfeitures

What is a defined contribution plan?– 401K– Annuity– Supplemental unemployment

Reasonable Relationship Issues

For prevailing wage credit, contributions must go for benefits

Contributions can’t be excessive compared to benefits

Measure benefits received

Examine costs as percentage of contributions

Reasonable Relationship Law

DOL requires Upheld in Miree and Royal Roofing Failed in Mistick

– Workers got benefits and remainder in cash with interest

– Contractor’s claim; DOL didn’t disprove Specific laws: California, Kentucky & Ohio Many states are modeled on federal law but

could also officially adopt the interpretation

Florida East Coast ABC

In 1998, this ABC Chapter charged its affiliated education trust $24,800 for rent and $69,438 for administrative services to train 550 students

In 2002, the Chapter charged its affiliated education trust $333,157 for rent and $954,408 for administrative services to train 914 students

Ohio Valley ABC Apprenticeship Trust

If training money is sent is a prevailing wage benefit deduction [i.e. a worker’s money] the Trust charges 50 percent administration fee.

If training money is sent from the contractor, [i.e. the contractor’s money] the Trust charges as little as an 8 percent administration fee.

Every year, the Trust pays an administrative fee to the Chapter, which it lists not in the income line but as a negative number in a schedule of other expenses.

ERISA Laws

Breach of general fiduciary duty

Prohibited transactions

Remedies: Removal of fiduciaries, disgorgement

Standing: Current participant, or U.S. DOL Secretary of Labor

Contractors Choice Trust Health Plan

Between 2003 and 2006, the Trust spent $82 million on health care premiums and $16.7 million on commissions and administrative fees.

$9.1 million of these fees and commissions were paid to a company owned by two plan trustees.

While not a non-profit, the Trust does not pay state or federal income tax due to what it calls the “body of case law” about complex trusts.

Account Balances Kept

Contractors Choice Health Plan– Keeps accrued dollar bank balance unless the

worker asks for the money back

Western Electrical Contractors Pension Plan– Separated workers must wait 3 years to get

balance, and in fifth year money is forfeited.

U.S. DOL Benefit Documents

www.freeerisa.com U.S. DOL office for auditor’s report and older

documents – Welfare plan filing issue– Training trust exemption issue

Participant access laws

ERISA Information Rights

ERISA 104(b)(4) allows current participants or beneficiaries to ask

Statutory list:– summary plan description—[can help cost the plan]– latest annual report– any terminal report– bargaining agreement– trust agreement– Contract or other instruments under which the plan is

established or operated

Whom To Ask

Plan Administrator Check SPD or filings for identification Default: Plan sponsor

– May be employer– May be trade association or even provider

“Third-party administrator” usually not Plan Administrator

Enforcement Of Requests

ERISA 502(c) gives 30 days to furnish– Can file suit in federal court and win fines and attorney fees

ERISA 510 says Unlawful to discharge, fine, suspend, expel, discipline, or discriminate against requester

– Unlawful for “any person” to do this; contractors (current or future) or apprenticeship plans

ERISA 502(a)(3) allows for reinstatement and attorneys’ fees,

– Can use of Federal court, not NLRB or other agency.

IRS laws

Misuse of 501(c)3 money Failure to disclose related party transactions Action by the IRS is the only recourse, but

the IRS documents can also help show violations of other laws.

National Association of Prevailing Wage Employers

A nonprofit founded by a father and son insurance agent team.

IRS annual reports for 17 affiliated nonprofit benefit plans disclose fees of 11% of annual contributions. – Denied made to a related nonprofit, while the plan

website lists an administrator owned by the family DOL annual report form 5500s would solve the

controversy, but none have ever been filed. Individual participants are not informed of the

amounts in their account, nor are they allowed to file claims—a right reserved for the participating contractor/employer.

Other Nonunion Groups

The Air Conditioning Trade Association (ACTA) Training Trust spent $771,026 on salaries from 2002 to 2004, while ACTA itself spent only $153,732

– The Chapter’s program graduated 14 apprentices a year.

The Western Electrical Contractors Association (WECA) Trust paid WECA a $1.6 million “administration fee” in 2005.

– This was three times the amount WECA raised through membership dues

IRS Documents

IRS Annual Reports – Request to IRS – www.guidestar.org– Public access laws for last 3 years filed

Application to become a nonprofit– Request to IRS – Public access laws if filed after July 15, 1987.

Miscellaneous Other Legal Issues

U.S. DOJ actions RICO False Claims Act IRS Tax Fraud Finders Fee

How Much Work is at Stake?

In 2006, employers contributed almost $100 million to the pension plan of the Associated Prevailing Wage Contractors.

If these pension deductions were 10% of payroll, their workers were paid $1 billion of Davis Bacon wages.

If labor is a quarter of construction costs, these nonunion contractors performed $4 billion in prevailing wage work in 2006 alone in just this one plan.

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Documents

State and federal certified payrolls U.S. DOL benefit plan documents IRS nonprofit documents

Certified Payroll Forms

General Problems – Some agencies refuse to release – Some agencies refuse to release names and/or addresses

Federal form: WH-347– Obtuse instructions

NYS FAQ on “Supplements:” Great NYS Form: Great but….

– “For contractor’s optional use” California Initial Benefit Statement

– Great form

Examples of Certified Payrolls

Maurer Electrical Suit Kote Lykins Reinforcing

Possible NYS DOL To Do List

Make NYS DOL certified payroll form mandatory. Get the NYS DOT on board.

Issue advisory that only remedy for failure to properly file certified payrolls is to stop progress payments to the general contractor.

Create an initial benefit statement filing requirement like in California.

Take action when given good cases

Examples: U.S. DOL Benefit Plan Documents

List of Schedules and how to get Helix Electric—Schedule A BCBS Monthly Rates HGH Electric—Schedule I Contractors Choice Trust—Schedule H and

Auditor’s report

Estimating Hourly Benefit Costs

Schedule A and/or Form 5500– Number of worker covered

Schedule A, Schedule H/I, or auditor’s report.– Cost of benefits paid by employer

Estimate hours worked for the year– 2,080 or 1,820

Multiple number of workers by hours worked for total hours worked under the plan

Divide cost of benefits by total hours worked to get the estimated hourly benefit costs.

Empire State Highway Contractors Association – Health Plan

Fully self-insured as of 2006 Claims to be a single employee “Taft-Hartley” plan Pays vacation and apprenticeship benefits as well Also pays all the fees for the retirement trust

– In 2006, $6.4 million for health care versus $1.8 million in administrative cost

“Excess money” is sent to the retirement plan. The plan’s members once “owned” 80% of the Oriska

Insurance Company, which provided the health care. – DOL investigated. Ownership and coverage ended

ESHCA 2006 Health Plan Report -- Delaney Construction

Company contributed $1.6 million. Workers need 800 hours to qualify for coverage Plan provides coverage for six months of

unemployment. [unless you quit or were fired] Plan provides coverage for all company employees

but with two different levels of contributions.– Prevailing wage fringes or– 1.5% of compensation for employees “for whom no such

contributions is made.” “Excess contributions” over the cost of these benefits

are paid to the retirement plan– Delany currently owes $1.3 million in such contributions.

Empire State Highway Contractors Association – Pension Plan 2006

$129 million in assets, $6.7 million in employer contributions.

– “None of the investments are participant directed” Defined contribution plan for all employees

– Funded by the “prevailing pension supplement” or – 1.5% of compensation for employees “for which no prevailing

pension supplement contribution is made.” 1,000 hours required “to receive your allocation.”

– Unless attained age of 59.5 years, who need no work hours. Once awarded, amounts vest slowly

– 20% after three years, 100% after seven years Non-vested amounts forfeited and divided up among

remaining participants.

ESHCA 2006 Pension Plan Report -- Delaney Construction

Filed as a single employer plan with Delaney listed as sponsor and administrator.

Delaney’s contribution was $1.6 million– $1.4 million of that was listed as a receivable

The plan held $850,540 in forfeitures at the end of the year.

Another $109,005 in forfeitures were “reallocated” at end of the plan year.

GMR Associates Benefit Plan

$11 million in annual contributions in 2006 44 upstate NY nonunion contractors participate “Defined contribution plan” that provides “insurance

and non-insurance benefits.” – medical, training, sick, holiday, vacation, pension,

supplemental unemployment, etc– Employees fully vested in all contributions

Audit provides little information on spending – $10.1 million as “benefits paid to participants”– $500,182 in “management fees”

GMR Associates Benefit Plan-- RSI Roofing Documents

The GMR cascading buckets– Health care holds a 7 month premium balance– 401K only receives prevailing wage contributions– SUB receives the balance of prevailing wage

fringe, and rolls it over to the health care account

GMR pays no interest on the money held RSI offsets profit-sharing contributions by the

fringe amount received.

GMR Associates Benefit Plan-- RADEC Electric Documents

Made 401(k) contributions and training contributions only on prevailing wage jobs.– Likely did the same for vacation and sick pay

contributions

Paid only half of health care premiums on private jobs– took a fringe credit for the full amount on

prevailing wage jobs.

Examples of IRS documents

How to get Ohio Valley Construction Education

Foundation Ohio Valley Associated Builders and

Contractors (ABC) Chapter Western Electrical Contractors Association

Training Fund Western Electrical Contractors Association

(WECA)

Empire State Highway Contractors Association – Apprenticeship Fund

A trade association with 2006 income of $760,000 – $350,000 each from benefit and apprenticeship administration – Sponsors laborer, carpenter, and operating engineer

Seven staff on the website; only one with apprenticeship in a job title.

Reported spending only $29,500 for training and instructors.

The training is done by a related for-profit entity.– The Association claimed the entity was a nonprofit on IRS

annual reports– The same for-profit owns the school [43 acres of mostly

farmland]

Empire State ABC Training Trust

Charges a 12% “accounting fee” on all contributions.

Does not credit any earned interest to the beneficiary’s training fund account.

Takes all money from a training account that is not used within 12 months.

Tuition often exceeds $2,000, far more than comparable courses at a community college

Empire State ABC Chapter

The Chapter’s “training income” the last four years was $2.2 million.

The Training Trust stated it would pay the tuition to the ABC Chapter in its application to become a nonprofit

In the last four years, the Trust listed over $800,000 in spending as “education.” – Not allowed under IRS annual reporting rules– Were did the money go?

Empire State ABC Chapter—Tax Fraud

The ABC Workers Compensation Trust has been paid the Chapter some $115,000 a year. – Federal and state tax is due on this income.

The Chapter filed tax returns; with false deductions.

– 15% of Rebecca Meinking’s time– 10% for office space– 100% of the costs for three cars

The Trust stated the Chapter did no work– an “endorsement fee” based on total premiums

NonUnion Apprenticeship Programs

Performance Issues

Unions Enroll and Graduate More Apprentices

Unions Enrolls and Graduate More Female and Minority Apprentices

Nonunion Programs are Deeply Flawed The U.S. Department of Labor Refuses to

Take Action About this Problem

Construction Apprenticeships--2003

Enrollments

20%22,000

80%88,000

Union

Non-Union

Graduations

14%6,000

86%37,000

Construction Apprenticeships36 States in DOL System: 1989-2004

Female Enrollments

81%

19%

Union

Non-Union

Minority Enrollments

27%

73%

Misuse of Journeyman to Apprentice Ratios

Determine ratios for particular craft Examine ratio on apprenticeship program

annual reports Examine ratios on private jobsites as well as

prevailing wage jobsites

Failure to Provide Continuous Employment

Review program standards and state law for wording on obligation

Research how program is really run Role of lay offs in a multi-employer non-

union apprenticeship program Role of ULPs in a multi-employer non-union

apprenticeship program

Improper Apprentice Wage Scales

Review wage rate scale in approved apprenticeship standards

Investigate actual non-union wage rates paid to the journeymen and apprentices

Locate apprentices who have been cheated and who want to take legal action

Call for better NYS regulations have been filed

Failure to Provide Related Instruction

Classes and hours Competent instructors Proper training materials Adequate facilities State licensing

Decker College

A for-profit construction craft training school funded by federal student loans

Three of four branches in partnership with ABC chapters

Former top ABC/NCCER leader Dan Bennett was on Decker staff

Former Massachusetts governor and former NY candidate for governor William Weld was Decker CEO and part owner

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Workers Compensation Costs in Construction

Costs Rules Scams

Workers Compensation Costs as a Percent of Payroll--2005

1.6%

2.2%

5.0%

0%

2%

4%

6%

8%

10%

Service Manufacturing Construction

Median Workers Compensation Rates per $100 of Payroll

$6$8

$12

$16

$28

$0

$10

$20

$30

$40

$50

Electrical Plumbing Masonry Carpentry Roofing

Government Regulations

Monopoly States– WV, Ohio, Washington: great for fraud research

Non-Monopoly States– Everyone else

National Association of Insurance Commissioners [www.naic.org]– Database of experience ratings from all major

insurers and clients--access for members only State Insurance Departments

– Largely industry run

Workers Compensation Scams

Paid off the books Paid as independent contractors Misclassifications of workers

– Claims denials

Temp agencies and employee leasing firms– Experience ratings games / misclassifications of work– Claims denials

Self-insured status: single or multi-employer– Misclassifications of workers– Claims denials

Labor Ready--1998

Classified 47% of employees as “office services” work in Washington State

Classified 25% of its workforce as “retail store employees,” or “clerical office employees,” or “salespeople” in Ohio.

CEO stated Labor Ready “focuses strictly on blue-collar labor.”

Renamed TrueBlue Inc and has survived Bought Contractors Labor Pool

– – 80 locations mostly west coast

Empire State ABC Workers Compensation Trust: April 2005 to May 2006 annual report

380 contractor members $20 million in contributions, up from $2 million

in 1999 The Trust claims injuries have declined 40%

in last 5 years. The reasons– “financial penalties & rewards” based on claims

experience – “aggressive claims investigations and litigation”

Nationally, workers compensation claims in construction rose 20% from 2002 to 2006.

New York State Workers’ Compensation Board: Filings by Self-Insured Plans

Annual financial statement Trust agreement and by-laws List of contractor members Contributions by worker classification codes

– In aggregate AND by each employer All denied as trade secrets after my FOIL.

– Improperly used the trade secret exemption– Refused to segregate material or to acknowledge the Trust

has made material public– Ignored advisory opinion from Committee on Open

Government in NYS Secretary of State’s Office.

New York State Workers’ Compensation Board: Agency Failures

Employers who are self-insured, or who participate in a group self-insurance trust, are exempt from the misclassification law. – Statute refers to premiums. Self-insured and

group members only pay “contributions.” – This has legalized cheating and ignores claims

suppression The agency will not conduct dual audits with

NYS DOL as part of the task force– The agency will, however, “share results.”

Key NYS Joint Task Force Goal: Data Mining to Find Fraud

Create an industry-occupation matrix, from the BLS or from the NAIC

Compare the occupation breakdowns in the matrix to the to self-insured group members in the construction industry.

Investigate the statistical outliers– A plumbing contractor who claims to employ 50%

clerical workers and 40% laborers.– Electrical contractors with no electricians

Possible Action Steps

Temporary Agency and Professional Employment Agency workers compensation classification bill

– Experience rating follows the company– California Building Trades tried this but failed

File for advisory ruling from the Committee on Open Government in NYS Secretary of State’s Office

– They will support the claim but the opinion is not binding File FOIL on the ABC Workers Compensation Trust

– Then sue the York State Workers’ Compensation Board Rewrite the premium fraud law, or win a better

agency interpretation of the existing law– Premium fraud requires claims suppression; examples of

this will build the case for change