Illegal Labor Practices in the Philadelphia Regional Construction Industry: An Assessment and Action Plan

Russell Ormiston
Stephen Herzenberg
Publication Date: 
January 11, 2019


This brief, buttressed by the companion national literature review by Professor Russell Ormiston of Allegheny College, presents multiple sources of complementary evidence that point to a single, simple conclusion: US and Pennsylvania labor law and labor standards are routinely violated by many contractors in the Southeast Pennsylvania regional construction industry. These violations threaten to transform growing shares of the construction sector—an industry that still provides significant numbers of well-paid jobs to highly skilled non-college workers—into low-wage, low-skill jobs, further undermining the region’s middle class and increasing already-gaping inequality.

Labor standards violations victimize workers and their families, taxpayers, law-abiding contractors, and construction customers including public sector entities.

• Workers get cheated of the pay they have earned and need to support their family.

• Local businesses suffer because lower-wage workers, some from outside the region, consume less.

• Taxpayers lose because worker victims of wage theft pay less in taxes. Taxpayers also lose in some cases because irresponsible contractors win public contracts awarded to low bidders and then use “change orders” to increase project cost beyond the original bid.

• As well as losing income, workers and their families may suffer because of injuries suffered on the job. Such injuries are more common among contractors who violate labor standards and, in some cases, rely on informal labor markets essentially outside the purview of labor law.

• Law-abiding contractors lose business and profits—and pay higher unemployment insurance taxes and workers compensation premiums—because their competitors underpay. Law-abiding contractors also face pressure to begin violating standards and cheating workers themselves—in a potential “if you can’t beat ‘em, join ‘em” downward spiral that spreads destructive competition.

The evidence for these problems comes from:

• The growing body of national research literature surveyed in more detail by Professor Ormiston.

     o Studies of worker misclassification in other states suggest that, if Pennsylvania has rates of misclassification in the construction industry comparable to these other states, it loses about $10 million in unemployment insurance taxes, at least $15 million in income tax revenues (and possibly three times as much), as much as $83 million in workers compensation premiums, and $200 million in federal income taxes.

     o More recent studies based on surveys of workers suggest higher rates and costs of worker misclassification.

           One study showed that 70% or more of workers in Los Angeles residential construction experienced non-payment of overtime and working off the clock.

           A new study in Michigan found 73% of workers in residential construction misclassified as independent contractors. Misclassified workers lost an estimated $6,000 per worker—or $7.9 million annually—in just drywall contractors in this one region. Researchers also estimated a loss of $8.8 million in Social Security and Medicare taxes and $9.5 million in state workers compensation and unemployment insurance payments.

     o The research literature shows labor standards violations bleeding into commercial construction, including of publicly funded multi-family housing.

     o Five studies document higher injury rates higher among non-union construction contractors than unionized contractors. (Construction in the United States accounts for nearly one in four fatalities on the job, over four times its share of US employment.)

• Enforcement of Act 72, the Pennsylvania Construction Worker Misclassification Act, implemented in 2011. Since 2014, the number of cases pursued under the Act annually has risen from 50 to 185 to 297 cases, including 46 cases in metropolitan Philadelphia in 2017. Administrative penalties collected under the Act have risen nearly 30 times since 2014: from $12,700 to $360,360 in 2017. Even with this increased activity, enforcement driven by worker complaints—with the most vulnerable workers least likely to complain—only scratch the surface of the worker misclassification problem.

• Numerous settled class-action suits in which construction contractors agreed to compensate workers for violating overtime laws on projects within Southeast Pennsylvania.

• A dozen interviews with workers with experience working for non-union contractors in the SE Pennsylvania construction industry.

• Academic research documenting that the Philadelphia residential construction industry operates “informally,” without even a pretense of applying US and Pennsylvania labor law and standards.

Since the evidence is overwhelming that irresponsible contractors are a presence in the regional construction industry, the Pennsylvania Department of Labor & Industry, Attorney General, and local governments in SE Pennsylvania should partner with industry stakeholders and philanthropy to develop a comprehensive multiyear research project to better gauge the scope and nature of this problem. Responsible statewide and local government entities should also develop an enforcement and technical assistance plan that can drive compliance with the law to 100% (which is, after all, the goal). This should include a study using up-to-date methods informed by earlier studies conducted in other states on the extent of worker misclassification in the construction industry (using UI records and audits, and also using Pennsylvania’s data sharing agreement with the Internal Revenue Service); a comprehensive analysis of data extracted to date through enforcement of Act 72; a larger-sample and in-depth interview-based study that uses innovative methods to ensure adequate sampling of vulnerable workers likely to be victimized by irresponsible contractors; interviews with insurance companies and regulators; and qualitative research on the “business strategies” of law-abiding contractors, both non-union and union, to distill lessons for how to use carrot and stick to get more contractors to deploy such strategies and comply with the law.

The desirability of more comprehensive data does not obviate the need for action now to reduce this problem. One of the most obvious first steps for public sector entities is to increase vigilance to ensure that irresponsible contractors do not participate in and profit from publicly funded construction work. One tool that has virtually eliminated participation of irresponsible contractors on 70 individual projects and $25 billion of construction in SE Pennsylvania—private as well as public—is the use of Project Labor Agreements (PLAs). As well as preventing participation of contractors that violate labor laws, PLAs can be used to increase participation of local labor (e.g., from the school district, municipality and/or county of the project) and to ensure economic opportunity for a diverse population.