How Corporations Get Away With Rampant Wage Theft

A landmark survey survey of thousands of low-wage workers in New York City, Los Angeles and Chicago found that 26 percent had been paid less than the minimum wage the week before they were interviewed. According to the 2009 report by the National Employment Law Project and two other groups, 76 percent of the workers who put in more than 40 hours did not get paid or were underpaid the required time-and-a-half overtime rate. About 17 percent of the workers put in unpaid time “off the clock” before or after their shifts, another violation. In the three cities alone, the study estimated, low-paid workers were losing more than $56.4 million per week to wage theft.

As the main cop on the beat, the Wage and Hour Division over the last five years has put almost $1.1 billion in back wages back in the pockets of underpaid workers. But with just over 1,000 investigators to oversee about 7.3 million business establishments, agency officials concede that violators have a good chance of not getting caught. Said Laura Fortman, the agency’s deputy administrator:  “Some businesses may take that kind of calculated risk because the likelihood of being investigated is actually so low.”

Business advocates say many violations are unintentional and involve close calls, such as decisions about whether to exempt certain employees from overtime or treat others as independent contractors.   

 “Wage theft, by its very nature, implies an intention to steal wages,’’ said Richard J. Reibstein, a New York attorney in the labor and employment practice group of Pepper Hamilton LLP. “You should not put the same label on all of these things.’’ There are “gray areas as well as black-and-white areas.’’

Frank Cronin, a lawyer in Costa Mesa, Calif., who has represented employers for more than 30 years, called wage theft an “activists’ bumper sticker to get politicians a basis for passing more laws.”  Violations are “almost always unintended misinterpretations” of complex laws, or “a new interpretation being imposed by extremely aggressive lawyers and/or regulators.”

Matthew Haller, a spokesman for the International Franchise Association, a trade group, said that many franchise operators cited for violations “are people that have never been in business before, that with good intentions may run afoul of these complex regulations.”

But some firms have shown real ingenuity in cheating and covering it up. In 2009, for example, federal investigators found that several Los Angeles garment makers were using specially designed software to create false payroll records. The firms were paying workers piecework rates that fell below the minimum wage. However, according to an investigation report, the software allowed them  ‘’to generate falsified payroll registers that displayed an appearance of compliance.’’

In other cases, officials say, construction firms have declared workers to be part-owners to deny them wage and hour protections and workers’ compensation insurance.

Globalization, the decline of organized labor, and an immense pool of immigrants who are afraid to rock the boat all have played a part, along with limited enforcement staffs. Moreover, even when  compelled by judgments or settlements to pay back wages, some employers disappear or go out of business before victims can collect.

Fundamental shifts in employment practices have also helped wage theft to flourish, officials and experts say.

One trend–misclassifying workers as independent contractors —is not new but has drawn increased attention as a pervasive feature of the underground economy. Independent contractors are supposed to be people who set their own hours and offer services to multiple clients. But the label has often been imposed as a condition of employment on working stiffs who in no way are running their own businesses. When that happens, the worker loses wage protections, while the employer escapes payment of Social Security, Medicare, unemployment taxes and workers’ comp.

“Employers are working very hard not to pay wages, and to put employees in difficult situations where it’s a ‘take it or leave it’ type of situation,” said Gary K. Pechie, director of the Connecticut Department of Labor’s Wage and Workplace Standards Division.

The “very challenging” task of interpreting differing state laws is behind many of these cases, Reibstein argues, adding: “The standards and tests for independent contractor status are anything but clear.’’

Even so, the incentives to misclassify workers are powerful. A report by the Treasury Department’s inspector general found that for each worker making $43,007 (which the report called an average wage), misclassification saves the employer $3,710 per year in federal taxes alone. “The misclassification of employees as independent contractors is a nationwide problem affecting millions of workers that continues to grow,” the report said. Since 2011, the Wage and Hour Division has signed cooperative agreements with the IRS and 15 states to fight misclassification.

Outsourcing hiring to staffing agencies and subcontractors also encourages wage abuse, authorities say. It can result in companies at the top of the food chain pushing responsibility for labor standards onto smaller, weaker companies that are less likely to comply.

‘’Every time there’s that kind of increased distance between a company and their core work force, then the probability of wage theft goes up,” said Janice Fine, an associate professor of labor studies  at Rutgers University. When the top-tier companies are “many levels disconnected from’’ the work force, they “don’t have to accept responsibility” for working conditions, Fine said. “And when the profit margins they’re offering to contractors are so tight,’’ the contractors “are skimping on things like wages.”

The outsourcing of hiring to alleged violators of wage standards has been the focus of a federal class-action suit in Los Angeles against Walmart and three of its contractors and subcontractors. The suit by workers at Walmart-leased warehouses in the Inland Empire region east of Los Angeles claims that Walmart is jointly responsible for employees being “forced to work long hours, under oppressive workplace conditions, for legally inadequate pay.” Walmart says it did not control hiring or pay practices and was not to blame if violations occurred. Under a proposed settlement filed in court this week, one of the Walmart contractors, Schneider Logistics, will pay a settlement to the workers of $21 million, and claims against both Schneider and Walmart will be dismissed.

While small, fly-by-night companies are often the culprits in wage cases, large and iconic businesses have been cited, too.

The San Francisco Giants baseball club, which pays its most famous employees spectacularly well, last year agreed to pay more than $500,000 in back wages to dozens of clubhouse and administrative workers the Labor Department said had not received minimum wage and overtime pay.

In recent years, scores of fast food restaurants–including McDonald’s franchises in Colorado, Subway stores in Michigan, Ohio and Florida; Dunkin’ Donuts shops in New Jersey and New York; and Domino’s Pizzas in Florida—paid back wages after being cited for such violations as failing to pay employees for all hours worked.

In 2011, Farmers agreed to pay more than $1.5 million in back wages to nearly 3,500 call center employees after federal authorities accused Farmers  of ‘’significant and systemic violations”  of overtime and record-keeping rules.  In recent years, major retailers, including Staples, Walmart and Levi Strauss have agreed in settlements to pay millions of dollars in back wages to workers after being accused of improperly exempting them from overtime.

Bloom Energy, a Silicon Valley producer of fuel cells whose board includes Gen. Colin Powell and famed venture capitalist John Doerr, was found to have violated minimum wage and overtime rules by paying the equivalent of $2.66 an hour to 14 laborers it brought to company headquarters on visitor visas from Mexico. The workers were being paid in pesos the equivalent of $130 for 49-hour weeks, the Labor Department found. ”To work here in the United States and make $130 a week is pretty egregious,” said Ruben Rosalez, Wage and Hour’s Western regional administrator. Bloom, which agreed to pay more than $70,000 in back wages, damages and fines, blamed the violations on “a breakdown in our internal processes.”

Then there’s Urasawa, a Beverly Hills sushi place rated by The Daily Meal as the country’s second most expensive restaurant, with an average tab for two topping $1,100. In February, 2013, the California Labor Commissioner ordered the restaurant to pay back wages and penalties after finding that kitchen workers weren’t getting time-and-a-half overtime pay despite putting in 10½-hour days. The investigation was triggered by a complaint from a long-time employee who said he was fired for asking to leave before the end of his shift because he had a fever and the flu.

Cops on the Beat

Enforcement, which fell into the doldrums under President George W. Bush, has become more aggressive in the Obama administration, with an emphasis on low-wage industries. But according to experts and advocates, pay violations are so pervasive—and the temptation to cheat so great—that the impact is uncertain.

The ranks of Wage and Hour investigators fell sharply under President Bush to 731 in fiscal 2008, the lowest number in decades. The Government Accountability Office assessed the situation and did not mince words: “The Department of Labor has left thousands of actual victims of wage theft who sought federal government assistance with nowhere to turn,” the watchdog agency said in March 2009.

In some cases complaints weren’t being investigated for months or even more than a year, the GAO said. Other times, investigators dropped cases simply because employers disagreed with the complaint or did not return phone calls. “Far too often,” the GAO said, “the result is unscrupulous employers taking advantage of our country’s low wage workers.”

Wage and Hour has since added 300 more investigators, and boasts that two-third of its investigators speak at least one language besides English. Even so, the current total of 1,032 is about 20 percent below the high-water mark of the late 1970s, when there were many fewer business establishments than today.

States enforce wage standards to varying degrees. A 2010 survey by Policy Matters Ohio, a nonprofit research group, estimated the number of inspectors for all of the states at 660. California, New York, and Connecticut are among the most active, but others have slashed enforcement due to budget cuts, and some states do no enforcement at all. That leaves significant gaps because federal jurisdiction extends only to businesses with annual sales of at least $500,000 that are engaged in interstate commerce.

“Through reduction in the size and role of the federal and state workplace agencies, employers and industry sectors face a trivial likelihood of investigation in a given year,’’ said a 2010 report prepared for the Wage and Hour Division. For example, the chance of a fast-food restaurant seeing an investigator was about 1 in 12,000 in a given year, while the risk for a garment manufacturer was about 1 in 1,250 (The report’s principal author,  former Boston University professor David Weil, was confirmed in late April as the new administrator of the Wage and Hour Division).

Private lawsuits seeking back wages for underpaid workers fill part of the gap. However, attorneys are drawn mainly to big-dollar cases–such as overtime class actions for white-collar employees—not  to small claims by low-wage workers.

Paper Victories

Even when employees get back wage settlements or judgments, they often can’t collect.

Jin Ming Cao, a former restaurant worker in New York City, is due nearly $143,000 in back wages, but knows it’s money he’ll never see.  As one of 24 waiters and delivery workers for two Chinese restaurants that violated minimum wage and overtime rules, illegally deducted tips, and forced workers to buy their own uniforms and bicycles, Cao was to have shared in a judgment of more than $1.9 million

The restaurants didn’t show up in federal court to defend themselves, and were hit with a default judgment. By the time the gavel came down, however, the restaurants were closed.  Cao says the same owners were behind a new restaurant that opened a couple of blocks from one of the shuttered eateries. But lawyers for the workers couldn’t prove it, and the judgment issued in September, 2010, remains unpaid.

Cao, 31, said he had been hired in 2006 for $300 a month, plus tips, and worked 66-hour weeks. Now an organizer for a community group called the Chinese Staff and Workers Association, Cao said the futility of the lawsuit left him “really disappointed. They stole a lot of money from workers’ pockets.”

The case fits a recurring pattern of employers shutting down or disappearing to avoid paying what they owe, worker advocates say. “It really has become about hiding and transferring assets, dissolving a business and transferring it to a new corporation that, you know, is owned by their sister,” said Amy Tai, a lawyer for the Urban Justice Center in New York.

Recovering back pay is also a challenge for government agencies. The track record of California, one of the most aggressive states, is particularly striking. Under state law, employees can bring individual wage complaints to a hearing before a deputy labor commissioner. From 2008-2011, workers whose claims were upheld by hearing officers were able to collect back pay in only 17 percent of cases– often because the employer had gone out of business by the time of the hearing, according to a report sponsored by the National Employment Law Project and the UCLA Labor Center. Lumping judgments with settlements in which employers agreed to pay back wages, workers still got only 42 percent of  assessed wages.

Federal Wage and Hour officials don’t routinely track their collection rate. However, at FairWarning’s request agency officials calculated that of all cases closed in fiscal 2013, they collected 89.9 percent of back wages that employers agreed or were ordered to pay. The rest they were either unable to collect or did not try to recover after employers refused to pay.  Another reason for the high percentage is that the collection figures don’t count unsuccessful “conciliations’’—or individual complaints that wage investigators try, but fail, to resolve informally with employers.

A $787,000 default judgment against two Los Angeles garment shops is an example of a case that got away. According to court records, the companies had played the shell game of shutting down and reopening under a new name. The first of the companies, JNB 720, Inc., ceased operation in 2010 after being cited for wage violations. Then investigators learned about a new firm, Pop Corn, Inc., with the same owner, many of the same employees and the same illegal pay practices.

Workers putting in long weeks were being paid piece rates that fell short of the minimum wage, with no overtime after 40 hours. They were being charged a 1 percent service fee to cash their pay vouchers.

According to a court document, Daniel Kim, the owner of the firms, told investigators “that he could not pay minimum wage or overtime and stay in business.”

In August, 2011, a federal judge in Los Angeles entered the judgment against the two companies and Kim. But officials confirmed they have been unable to collect.

The challenge of collecting has led to campaigns to pass wage lien laws. Such laws, so far adopted in about eight states, allow workers with wage claims to put a temporary hold on an employer’s property while the claims work their through the system. Similar wage lien laws are being pushed in other states, including New York and California.

The issue is “critical,” because “all of our wage theft effort is for nothing if our clients aren’t getting paid,” said Michael Hollander, a staff attorney with the nonprofit Community Legal Services in Philadelphia. “If people are winning their cases but they’re not collecting, what rights are being vindicated?” he asked. “You have this piece of paper saying you won … but the employer gets away with it.”