Federal investigators are seeking to learn if the Related Group, Miami’s biggest developer, lowered costs on an affordable-housing project by hiring subcontractors who failed to pay employment taxes, the Miami Herald has learned.
The strategy involves treating workers as outside contractors instead of in-house employees. That allows companies to skip paying costly employment taxes.
Related hired subcontractors who did just that, according to certified payrolls obtained by the Herald through a public records request.
How workers are classified must be decided on a case-by-case basis. If companies wrongly treat employees as independent contractors — and don’t pay employment taxes — they violate the law.
Related’s business practices are under scrutiny because of a long-running federal investigation into South Florida’s affordable-housing industry. Investigators have recently focused on Edificio Piñeiro, a Miami apartment building for low-income seniors that Related developed with public money in 2014, according to sources with knowledge of the inquiry who were not authorized to speak on the record. Related has denied being targeted by investigators.
At Edificio Piñeiro, the majority of subcontractors hired by Related treated their workers as independent contractors rather than employees, payroll records show. Those workers included laborers, painters and bricklayers — basic tradesmen who are generally considered employees, labor experts say. True independent contractors are workers with advanced skills who set their own schedules and essentially operate as small businesses, according to federal and state rules; imagine a plumber brought in to fix an office’s leaky toilet or an outside attorney hired to handle legal paperwork on a specific project.
For business owners, treating employees as independent contractors means big savings: Companies have to pay a share of Social Security, Medicare and other taxes for employees. Independent contractors pay their own taxes.
Studies estimate employers who engage in the practice can shave 20 percent off their payroll costs. Those lower costs allow companies to undercut law-abiding competitors when bidding for jobs. Misclassification — as the tactic is known — robs government coffers of billions of dollars in tax revenue per year. Some research has linked misclassification to lower wages and vanishing benefits for workers who once formed the spine of America’s middle class.
In construction, “we see companies very commonly misclassifying workers,” said David Weil, a Boston University economist who led the U.S. Department of Labor’s Wage and Hour Division from 2014 to 2017. “The construction industry is very price-competitive.”
In an emailed statement, a spokesman for Related said: “It is our understanding that our subcontractors paid workers in full compliance with the law.”
Related declined interview requests and did not answer written questions, saying it is working with prosecutors on what it believes to be an “industry-wide review of the affordable housing sector.”
Because subcontractors pushed taxes onto workers, Related might have increased its profit margin on Edificio Piñeiro, a $6.7 million development in Miami’s Shenandoah neighborhood.
At least one Related supervisor knew what the subcontractors were doing — the companies wrote letters to a construction manager hired by Related stating they treated workers as independent contractors.
Edificio Piñeiro was developed by Related Urban Development Group, Related’s affordable-housing arm. Fortune Construction, a company wholly owned by Related, served as general contractor. The project was financed with Miami-Dade County general obligation bond funds and federal money. Related finished the project — originally granted $7.6 million — nearly $1 million under budget. The savings were returned to the county.
Even so, the U.S. Attorney’s Office and IRS are investigating the project’s cost structure to determine if Related padded bills and hung onto profits illegally, violations which could bring criminal charges, sources said. Prosecutors have already successfully targeted three other affordable-housing developers in Miami-Dade — Carlisle Development Group, Biscayne Housing Group and Pinnacle Housing Group — that used federal tax credits. The new investigation focuses on whether developers misused county funds. It was first reported by the Herald in June.
The inquiry is in its initial stages, and the U.S. Attorney’s Office has not sent Related a formal “target letter” saying it is under investigation. Last month, prosecutors subpoenaed Miami-Dade for records related to all bond-funded projects. A spokeswoman for the U.S. Attorney’s Office would not confirm or deny an investigation.
Related is the largest developer of luxury condos in South Florida and its affordable-housing division is a key partner of Miami-Dade’s government. The county chose Related to redevelop Liberty Square, a landmark public-housing project. Related Chairman and CEO Jorge Pérez is a politically connected billionaire whose name adorns the county’s art museum.
Misclassification itself does not break federal law. But because companies fail to pay taxes on misclassified employees and often do not provide labor protections, the practice can result in violations of the U.S. tax code and Fair Labor Standards Act. Some states have taken a harder tack: In Florida, the intentional misclassification of an employee is a felony.
“The misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy,” the U.S. Dept. of Labor states on a website devoted to the topic.
If Related subcontractors broke the law, prosecutors could attempt to flip them against the developer to advance their broader investigation.
Employee misclassification was the subject of a national investigation by the Herald and McClatchy Newspapers in 2014. Reporters found the problem was widespread in affordable-housing projects paid for with Obama administration stimulus money.
While regulators failed to scrutinize public projects, they were paying attention to misclassification in private industry: The feds have fined drywall contractors, janitorial firms, cable installers and other businesses. State agencies also stepped up enforcement, and FedEx last year agreed to pay $240 million to settle lawsuits from drivers in 20 states who said they had been misclassified. Exotic dancers have also won settlements.
Recently, Alex Acosta, the new labor secretary and a former Florida International University law school dean, signaled the Trump administration could take a more employer-friendly approach.
Independent or not?
Because Edificio Piñeiro received federal funding, Related’s subcontractors had to pay workers a federally mandated wage. The subcontractors were required to keep weekly records of workers’ pay and job descriptions. The Herald requested those payroll records.
Eleven of the 15 subcontractors treated all their workers as independent contractors, the records show.
“That’s a big red flag,” said Matthew Capece, an attorney with the United Brotherhood of Carpenters. “The level of control needed on a construction project ... would preclude having so many individual workers as independent contractors.”
Before starting work, the Related subcontractors wrote identical letters to Donna Milo, whose company was hired to supervise the subs. The letters stated that workers for those subcontractors would be treated as independent contractors. Milo is the aunt of Albert Milo, the head of Related’s affordable-housing division. Federal investigators are seeking to learn more details about her role in the project, one source familiar with the probe said.
In an interview, Milo, whose company is Donna E. Milo Inc., said she acted properly. She said she was not familiar with the tax arrangements of subcontractors.
“As someone who builds, I don’t have much knowledge ... of how that works,” said Milo, a one-time candidate for Congress. She had no comment when asked if federal authorities had contacted her.
One Related sub, Anthony Clarke, told the Herald he was “baffled” by records showing he treated workers as contractors. He said he understood it as his legal obligation to treat those workers as employees. Clarke himself — the firm’s president and owner — was listed as an independent contractor.
“This is totally the opposite of what we do,” said Clarke, whose company installed fire alarms at Edificio Piñeiro. “Our employees get a W-2. I pay the taxes every month.”
(A W-2 is the tax form given to employees; independent contractors receive a 1099.)
As for the letter addressed to Milo?
“I don’t understand why I would sign anything like that,” Clarke said, although he acknowledged it was his signature.
The presidents of three other subs listed in the payroll records said they could not recall how they classified their workers. A fourth, Leonardo Ruano, did not recall working on the project.
The other subcontractors did not respond to questions or could not be reached.
Since 2014, the tax division of the U.S. Department of Justice has won more than 70 permanent injunctions against businesses that failed to pay employment taxes, according to congressional testimony last month by acting Assistant Attorney General David Hubbert. The employers had to pay back taxes. In the most severe cases — where business owners collected taxes but used them to line their pockets — executives were sentenced to prison time.
“When employers willfully fail to collect, account for, and deposit employment tax due, they are stealing from their employees and, ultimately, the U.S. Treasury,” Hubbert said.
In 2014, the Herald and McClatchy Newspapers reported that, during the recession, construction companies around the nation won bids for affordable-housing projects and then misclassified workers. All the while, federal regulators turned a blind eye.
In Florida’s construction industry alone, the Herald estimated that misclassification cost taxpayers nearly $400 million per year. In North Carolina, the number was even bigger: nearly $470 million per year. And in Texas, taxpayers were cheated of a staggering $1.2 billion annually.
The practice can put workers in danger: One misclassified employee was left without crucial medical care after he hit a live-wire during a Naples construction job. Misclassified workers can be denied minimum wages, overtime pay, workers’ compensation and unemployment benefits.
“It’s very difficult for [workers] to come forward,” said Catherine Ruckelshaus, general counsel at the National Employment Law Project, a nonprofit advocacy group. “They fear retaliation.”
The IRS looks at a variety of factors to determine classification, including whether workers have specialized skills, buy their own tools, require on-the-job supervision and have a temporary or ongoing relationship with their employer.
After the Herald/McClatchy series “Contract to Cheat” was published, the state of Florida signed an agreement with the feds to crack down on misclassification.
The Obama administration also issued new guidance to employers on classifying workers. In early June, the Trump administration withdrew those recommendations.
Miami Herald staff writer Rene Rodriguez contributed to this report.
Workers who believe they have been misclassified can make confidential reports to the Florida Department of Revenue by calling 800-352-9273 or emailing TaxViolations@floridarevenue.com.