BENEFITS FRAUD ON
PREVAILING WAGE JOBS
Apprenticeship, Health
and Welfare, and
Pension
Federal, King County, Drywall
Wages
Benefits
$5.71
Wages
Benefits
$12.23
$28.06
$23.00
1996 -- 20%
2006 -- 30%
Federal, King County—WA 1996 - 2006
Wage Increase
Benefits Increase
120%
106%
100%
78%
71%
68%
80%
60%
40%
35%
31%
30%
14%
20%
0%
Carpenters
Electrician
Laborer
Boilermaker
California, SF County, Bricklayers
Wages
Benefits
$9.75
Wages
Benefits
$18.45
$29.45
2001 -- 25%
$31.50
2006 -- 37%
California, SF County, 2001 - 2006
Wage Increase
Benefits Increase
89%
100%
80%
60%
42%
38%
36%
40%
20%
5%
8%
11%
7%
0%
Sheetmetal
Electrician
Sprinkler
Fitter
Bricklayer
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
–

Purpose: prevailing wage jobs don’t pay for all of
workers’ benefits
–

Defined contribution plans have an exemption from the U.S.
Department of Labor but not from the NYS DOL
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!
–

Criminal time for prevailing wage fraud
–

SB 6519 signed on Feb. 6, 2008
Failure to submit payrolls is now a felony
–

NY Supreme Court oked Jan 29, 2008
Second prevailing wage violation in five years,
disgorge all profits from the job
–

Rarely enforced to date
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
–

ERISA 510 says Unlawful to discharge, fine, suspend,
expel, discipline, or discriminate against requester
–

Can file suit in federal court and win fines and attorney fees
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.
BREAK
Documents



State and federal certified payrolls
U.S. DOL benefit plan documents
IRS nonprofit documents
Certified Payroll Forms

General Problems
–
–

Federal form: WH-347
–


Obtuse instructions
NYS FAQ on “Supplements:” Great
NYS Form: Great but….
–

Some agencies refuse to release
Some agencies refuse to release names and/or addresses
“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
–

Schedule A, Schedule H/I, or auditor’s report.
–


Cost of benefits paid by employer
Estimate hours worked for the year
–

Number of worker covered
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.
–

Defined contribution plan for all employees
–
–

Unless attained age of 59.5 years, who need no work hours.
Once awarded, amounts vest slowly
–

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.”
–

“None of the investments are participant directed”
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.
–

The Chapter filed tax returns; with false
deductions.
–
–
–

Federal and state tax is due on this income.
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
Union
NonUnion
20%
22,000
80%
88,000
86%
37,000
Graduations
14%
6,000
Construction Apprenticeships
36 States in DOL System: 1989-2004
Female Enrollments
Minority Enrollments
19%
27%
Union
NonUnion
81%
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 nonunion 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
BREAK
Workers Compensation Costs in
Construction



Costs
Rules
Scams
Workers Compensation Costs as a
Percent of Payroll--2005
10%
8%
5.0%
6%
4%
2.2%
1.6%
2%
0%
Service
Manufacturing
Construction
Median Workers Compensation Rates
per $100 of Payroll
$50
$40
$28
$30
$16
$20
$12
$8
$10
$6
$0
Electrical
Plumbing
Masonry
Carpentry
Roofing
Government Regulations

Monopoly States
–

Non-Monopoly States
–

Everyone else
National Association of Insurance
Commissioners [www.naic.org]
–

WV, Ohio, Washington: great for fraud research
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
–

Temp agencies and employee leasing firms
–
–

Claims denials
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 bluecollar 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
–
–

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
–

Experience rating follows the company
California Building Trades tried this but failed
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