Dathan Williams wasn’t shy when it came to bragging to his workers about how he was breaking the law.
The owner of a Seattle drywall company boasted to his employees about how he shortchanged them on pay and dodged taxes to gain an edge in bidding wars for work on government contracts.
The subcontractor also told his employees – many of whom were in the country illegally – how he reported workers to immigration authorities after they complained they were being underpaid.
Unfortunately for Williams, one of his workers was an undercover Seattle police officer.
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In July, Williams pleaded guilty in King County Superior Court to two counts of second-degree theft and one count of filing false payroll documents. He faces up to a year in jail and a $10,000 fine when he is sentenced later this month.
The Williams case is a high-profile example of the kind of payroll fraud that labor groups and state regulators say happens too often in Washington, despite the state being viewed as a model for detecting and prosecuting offenders.
Recently, the state has begun performing more site inspections of public works projects, and implemented a new database system to help find companies committing fraud. The state Department of Labor and Industries also reviewed more than 3,500 public contracts in fiscal year 2013 to check that contractors were complying with tax and labor laws.
However, government officials still aren’t convinced they’re catching everyone.
“We know that the types of actions that Williams engaged in are prevalent in the industry,” said Amanda Froh, the senior deputy prosecuting attorney who worked on the Williams case.
Williams’ offenses included failing to pay his workers the government-mandated prevailing wage on two public construction projects: a post office annex in Bellevue and a civic center in Moses Lake.
To evade detection, police reports say Williams fraudulently listed his employees as independent contractors – a scheme known as worker misclassification. Through misclassification, contractors can also avoid paying workers' compensation premiums, unemployment insurance and payroll taxes on their workers.
The problem of worker misclassification is widespread throughout the country, a yearlong McClatchy investigation found.
After reviewing public records from 28 states, McClatchy found nearly $400 million in squandered tax revenue from construction firms in Florida, nearly $500 million in North Carolina, and $1.2 billion in Texas.
Here in Washington, the Williams case is “an absolutely egregious example of the kind of abuses that can happen in the underground economy,” said Elizabeth Smith, assistant director for fraud prevention and labor standards at L&I.
“Not only is a situation like that allowing someone to underbid legitimate, law-abiding competitors, but the workers in that situation were treated horribly,” Smith said. “We don’t see cases like that every day, but every time you do see one, you wonder how many of them are out there.”
In the past few years, Washington state regulators have ramped up their efforts to combat misclassification and other forms of fraud, but violations still occur.
In the 2013 fiscal year, L&I found that 14 percent of the 3,954 employers it audited had misclassified workers. From those employer audits, the state was able to assess $12.7 million in unpaid workers’ compensation premiums, state officials said.
Still, most payroll fraud cases in Washington aren’t prosecuted. Between July 2012 and June 2013, L&I referred only three cases of employer fraud to prosecutors.
The following year, the agency pursued criminal charges in six cases, Smith said.
Though those numbers sound low, Washington’s record of prosecuting offenders is far better than most other states’, said Matt Capece, representative of the general president at the United Brotherhood of Carpenters & Joiners of America.
“Some states never pursue criminal charges,” said Capece, who is also an attorney. “In Washington, you do a lot better than most places.”
Washington state is similarly ahead when it comes to its methods of detecting misclassification and payroll fraud, Capece said.
In the past year, the state has debuted a new electronic system that allows L&I’s fraud detection officers to cross-reference data from several state agencies, including Employment Security, the Department of Revenue and the Secretary of State, Smith said.
The technology helps state enforcement officers find inconsistencies in companies’ paperwork and zero in on those that may be committing fraud, she said. The system also helps different state agencies share information about companies and refer potential violators to L&I.
Capece called Washington’s fraud-detection system “a model for the rest of the country.”
“There are a lot of states that don’t do cross matching to red flag the potential violators. They just don’t,” Capece said.
Washington also takes a close look at public building projects, Smith said. Every state and local public works contract worth more than $35,000 is reviewed by L&I. In fiscal year 2013, L&I reviewed 3,512 public contracts worth $4.1 billion, according to the agency’s most recent annual fraud report.
Last October, L&I began asking its construction compliance inspectors to visit a certain amount of public works projects each month. Now, each inspector must ensure that two out of their 40 monthly construction site visits are to public jobs.
Smith said that recommendation came out of the state’s Construction Underground Economy Advisory Committee, a group of state officials, labor interests and businesses focused on fighting fraud in the construction industry.
“There was a significant part of the group that thought there were violations on public works jobs we weren’t catching,” Smith said.
The state also withholds 5 percent of payment on public works contracts until it ensures workers’ compensation and other taxes are paid. To get their final payment, contractors must submit affidavits stating they have paid workers the prevailing wage rate set by the government.
But Smith said even those methods don’t always catch some of the worst offenders: subcontractors and contractors who employ workers completely off the books and lie on payroll forms.
“One of the tricky things about payroll fraud and the underground economy is there’s not a clear tracking mechanism for it, because it’s under the table,” said Evelyn Shapiro-O’Connor, union representative for the Pacific Northwest Regional Council of Carpenters. “I can tell you I still get reports all the time of wage theft and wage fraud.”
To catch some of the contractors who don’t leave a paper trail, Smith said L&I relies on referrals, often from labor groups such as the carpenters’ union.
In the future, Smith said her department intends to pursue more criminal enforcement, which she hopes will send a stronger message that defrauding workers and the state isn’t OK.
“When somebody owes an agency money, that is one thing,” Smith said. “But when it is criminal charges being filed, that hits a different level of the gut.”
Shapiro-O'Connor said she agrees that criminal prosecutions go further than civil penalties when it comes to educating the public about the consequences of payroll fraud. Shapiro-O’Connor and the carpenters union worked with Seattle police to coordinate the undercover sting that snagged Williams.
“It’s sort of to increase the public sentiment that this is absolutely criminal,” Shapiro-O’Connor said. “It is theft, and it is unacceptable.”