Wage-Theft-850

By Mike Schechter  

There are three main characters in wage theft stories: the deliberate criminals, the unawares, and the cleans. This article focuses on the middle group in the construction industry. We assume that if the deliberate criminals are undeterred by statute or prosecution, then they are banking on criminal defense counsel and wouldn’t read an article about imputed risks and prevention. The cleans are those who have good protections, practices, and relations, and would take corrective action if shown that a problem exists. Although the cleans may be interested to learn about the increased enforcement and model protocols, the middle group of unawares is the literary “everyman” that is most interesting.

This group comprises a spectrum bridging the deliberates and the cleans. Some may suspect that they have problems and, like the deliberates, choose to ignore red flags. Some may have red flags to which they are oblivious. Some may not be aware that wage theft is a crime or may not recognize that the business could be liable for a third party’s malfeasance. The line between culpable deliberate indifference and nonculpable ignorance involves determining whether the facts would put the business on notice that criminal activity likely was occurring, and whether it subsequently investigated.1 One key question is whether the business has systems to become aware of suspicious facts; another is, what does it do when it learns suspicious facts?

The red flags may be subtle or dramatic. For instance, when the business receives a bid for labor-intensive scopes of work, like drywall, one bid may be significantly lower than the others. Supplies like drywall are close in cost among contractors. Efficiencies in management and scheduling could account for small differences. The factor that can create a significantly lower bid is cutting labor costs. This creates powerful economic incentives to do so. 

Public ownership may inadvertently foster wage theft. On the one hand, public owners can adopt measures that prevent criminally low bids, such as enforcing the Responsible Contractor Law to filter out unethical contractors and requiring that workers be paid prevailing wages.  On the other hand, a public owner may believe that it is paying less for comparable, legal work, and it may be required to accept low bids (not realizing—or ignoring—that the bid is criminally low). If a public owner misses or ignores a red flag, a criminally low bid could win the work.

The warning flags also may be camouflaged. Construction projects typically use tiered contracting, so the warning flags and the identities of subcontractors may be buried beneath multiple levels of subcontractors. The cut corner(s) could be bundled among other costs and scopes, and there is a disincentive to inquire. In sum, it can be hard to tell whether an organization fell prey to confirmation bias, chose to ignore suspicious signs, or really did not know.

Other red flags are clearer, like conduct observed on the jobsite or the receipt of a file from a public or community investigator.  External investigations are increasing and putting more “unawares” on notice of potential problems.

The harms of wage theft 

“Wage theft” occurs under Minnesota’s criminal statute when an employer, with the intent to defraud: (a) fails to pay an employee all wages at the employee’s rate of pay or at the rate of pay required by law, whichever is greater; (b) causes an employee to give receipt for wages greater than the amount actually paid to the employee; (c) demands or receives any rebate or refund from the employee; or (d) in any manner creates the appearance that wages paid to the employee were greater than the amount actually paid.2 Wage theft can take the form of unlawfully withholding wages, evading employment taxes, misclassifying employees as independent contractors, or using other means that result in workers being paid less than they are legally owed.3

There are strong social reasons for the increased emphasis on combating wage theft. Wage theft victimizes the workers who are underpaid, may be housed in communal buildings, and may be shuttled like cattle in cargo vans to the jobsite. They often are deprived of basic worker rights and protections. Many receive little or no formal training or safety equipment, are uninsured, and meet a Dickensian fate if seriously injured.4

Also harmed are the legitimate contractors who lose the work because, by paying lawful wages, they are forced to make their bids higher. On the macro level, the economics push the legitimate contractors to thinner margins and smaller scopes of work. General contractors may be forced to take contract management work and have no power to prevent the owner—even the public owner—from awarding work to a suspiciously low bidder. When the economy sinks, the general contractor’s margins wither and the good companies could fail.

Finally, the state is harmed from tax revenue lost. One report concludes that Minnesota loses $136 million annually in unpaid income taxes, unemployment insurance contributions, and workers’ compensation premiums.5

New laws emphasize wage theft enforcement

Minnesota’s 2019 wage theft law was intended to counterbalance the temptations of wage theft by creating new wage notification requirements and protections for employees asserting their rights. It further made explicit that wage theft is a form of criminal theft and added enforcement authority to the Minnesota’s Attorney General’s Office to investigate and prosecute claims and to the Minnesota Department of Labor and Industry (DLI) to bring administrative actions (including compensatory and punitive orders). Finally, the law drew attention to wage theft as a significant state problem and funded new investigators.

The success of the wage theft law is unclear. Wage theft continues to be a significant issue in the Minnesota construction industry. While 18 percent of construction workers in the Upper Midwest report having experienced wage theft, Minnesota’s rate is 23 percent.6 A 2019 survey of non-union construction workers reports that nearly half of the workers surveyed have experienced wage theft.7

Critics point to the slow response by the AG’s office and DLI to hire investigators and begin actions, and by local governments to prosecute or refer cases to the state. There have been a handful of prosecutions in the news, which may or may not represent a significant success considering how recent the law is. Public officials speak in terms of ramping up and expanding enforcement efforts. For instance, Attorney General Keith Ellison personally spoke last year at a national conference about his office’s growing efforts, and reaffirmed that wage theft investigation and prosecution are high priorities for his office. Similarly, DLI has hired more full-time investigators. In April 2022, Gov. Walz proclaimed a “Construction Industry Tax Fraud Day of Action” to bring greater attention to wage theft issues.8

Community and construction associations also are engaging. For instance, a CLE at the January 2022 Construction Summit featured a community activist from Building Dignity and Respect Standards Council (BDC) and the head of the AG’s Wage Theft Unit. BDC and the trade unions, particularly Carpenters and Laborers, have been very active—including hiring investigators and meeting with public owners to expose violations and emphasize ways to prevent wage theft. They are emerging as a second front in the state’s increasing enforcement efforts.

This intensifying spotlight may create a scenario in which state or community activists provide a contractor or owner with specific information of wage theft on a project. Where once they might have dismissed red flags as red herrings, contractors in such instances will face the explicit decision to deliberately ignore the information or to investigate. Attorneys who work with contractors, either as in-house counsel or through outside law firms, may be called upon to advise the organization and, if so, should be aware of the potential implications under the Minnesota Rules of Professional Conduct (MRPC).

Evidence of wage theft implicates attorney’s duties under MRPC 1.13

The business organization that deliberately commits wage theft or willfully ignores its red flags risks criminal and civil prosecution as well as the organization’s ability to bid on future work. These constitute risks of substantial harm to the organization and thereby implicate an attorney’s duties under MRPC 1.13(b), which provides:

“If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act, or refuses to act in a matter related to the representation that is a violation… of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances, to the highest authority that can act on behalf of the organization….”

This means that the attorney who learns of reasonable flags that wage theft is occurring—whether in-house or outside counsel—may have the ethical duty to act. This duty to act is owed to the organization, not the business’s employees or officers. If the first officer refuses to take corrective action, the attorney must appeal the warnings up to the organization’s highest level. This highest authority “ordinarily will be the board of directors or similar governing body.”9

MRPC 1.13(c) further contains a rare exception to the attorney-client privilege, permitting the lawyer to disclose confidential information if the organization’s leadership chooses to ignore unlawful conduct. If the lawyer’s services are used in a way that furthers the unlawful conduct, then the rules may demand withdrawal from representation. 

Compliance to prevent the risk of wage theft

There are several takeaways here. First, the middle “unawares” group might be able to live in a space of ignorance or plausible deniability until it receives information that imputes notice of wage theft. As evidence and circumstantial suggestions of wage theft grow, the risk of liability also grows. Continuing to ignore these signs may be likened to playing a game of chicken. 

Second, increased investigative and enforcement efforts by the state and others may bring this notice sooner and more sharply. The key question here stems from the organization’s awareness of and decisions regarding “discernible” flags and “imputed” knowledge. How does the organization respond to a noticed flag? Does the organization proactively learn about flags where its knowledge could be imputed? For instance, job superintendents may see white cargo vans unload a multitude of workers, become aware through conversations with workers of evidence of wage theft, or make other observations that could impute to the organization sufficient knowledge to warrant investigation. A prosecutor could argue that the failure to learn or heed this information demonstrates willful indifference and renders the organization liable.  Demonstrating willful indifference toward wage theft is a dangerous strategy.

Third, the attorney who becomes aware of these flags—or becomes aware that red flags may exist and are being ignored—may owe a duty to protect the organization. This protection begins with advice and likely builds to creating compliance protocols. Model compliance protocols10 and the advice of outside counsel can help build or improve a compliance program to protect the business. Compliance efficacy rests on developing a culture of ethical behavior, the establishment of reporting mechanisms for noncompliant behavior, and the ability to audit and terminate subcontractors who could impute liability to the business. The investigation of concerns should be scalable—asking more questions when appropriate and, when concerns are verified, having the power to fix the problem or to terminate the contract with the violating subcontractor.

Wage theft is similar to other compliance matters. In matters ranging from preventing corruption to responding to harassment, organizations need to be on guard against the employee or subcontractor who is willing to cut corners, harm others, break the law, and risk harm to the organization. As wage theft spreads and the government increases its enforcement, lawyers need to be aware of the risks and any red flags, conscious of their duties to the organization, and prepared to advise client organizations. 


MIKE SCHECHTER is general counsel and director of labor relations with Associated General Contractors of Minnesota, a leading trade association in the construction industry that works with unions and provides educational events, form construction contracts, and the CHASE safety program. Mike also serves on the MSBA Construction Law Section Council.  mschechter@agcmn.org


Notes

1 E.g. United States v. Novak, 866 F.3d 921, 927 (8th Cir. 2017) (quoting United States v. Florez, 368 F.3d 1042, 1044 (8th Cir. 2004)).

2 Minn. Stat. §609.52. subd. 1(13).

3 Jonathan Moler, Wage Theft and MPRC 1.13, Presentation at Construction Summit (1/11/2022); see also Kelly Busche, Minnesota Leads Midwest in Wage Theft, Report Says, Finance & Commerce (1/20/2021), https://finance-commerce.com/welcome-ad/?retUrl=/2021/01/minnesota-leads-midwest-in-wage-theft-report-says/

4 Nathaniel Goodell & Frank Manzo, The Costs of Wage Theft and Payroll Fraud in the Construction Industries of Wisconsin, Minnesota and Illinois (https://midwestepi.files.wordpress.com/2020/10/mepi-ilepi-costs-of-payroll-fraud-in-wi-mn-il-final.pdf) at 1 (1/14/2021).

5 Id. at 15.

6 Id. at Executive Summary 1.

7 Busche at 1.

8 Proclamation of Gov. Tim Walz (4/18/2022).

9 Id. at cmt. 5.

10 See e.g. www.agcmn.org/construction-resources/forms