Friday, March 11, 2016

9th and 10th Issues: Payroll Taxes and Minimum Wage – They Are Only the Homeless (Part 1)

9th and 10th Issues:  Payroll Taxes and Minimum Wage – They Are Only the Homeless (Part 1)

The payroll tax and minimum wage issues involved different laws and different disclosure processes, but they both turned on the determination whether a set of clients who worked for HomeFirst qualified as employees.  These were technical matters that involved a lot of relatively small (for most of us, if not for the affected individuals) amounts payable to powerless people.

My discoveries arose, in part, out a reflection on the peculiar relationship between HomeFirst and Downtown Streets.  After Downtown Streets’ President complained to our CEO Jenny in 2013 about my refusing to pay a couple of unsupported subcontractor invoices that their controller had submitted, Jenny assured me that they had not attempted to defraud us.  The much smaller competitor was, she said, an important collaborator, based on their job training program that had inspired our similar “New Start” program.  Okay, but I was not convinced and never paid them.

Because our New Start clients were similar to the “team members” doing work for Downtown Streets, I wondered whether the compensation both sets of clients received met minimum wage requirements.  My first internet search pulled up news, surprising to me, that California payroll taxes were due on the value of lodging and meals provided in exchange for work.  I asked for clarification from EDD – the California Employment Development Department, which deals with payroll tax fraud – and they confirmed our obligation. 

On the day after Jenny criticized my unannounced kitchen audit in May 2014, I recommended that we engage a labor attorney to consider solutions to this new problem, which could involve $25,000 a year of new costs.  She responded much as she had to the residential licensing issue: she asked (i) how do other companies handle their client-workers, (ii) how much could it cost us, (iii) had anyone brought it to our attention, and (iv) do we have other more pressing things to work on?  All reasonable questions, however time-consuming to answer and unrelated to the essential legal question.  Bringing problems to her like this was not acceptable, she said, and we needed a plan for future compliance work.  The next day, I filed my online complaint with EDD. 

I continued to research whether New Start clients needed to be paid the minimum wage rate.  Key to whether the payroll tax and minimum wage issues were really violations was the question whether the New Start clients, who worked about 20 hours a week along with our employees in the kitchen serving up to 250 clients three meals a day and in maintaining the 36,000 square foot shelter facility, were properly considered employees.  This was another question, like residential licensing, that had gone unattended for years, and now I was making it a problem for everyone.

A year earlier we had reevaluated the New Start program, which was intended to provide “job-readiness” training for homeless clients.  We lacked sufficient resources for really training the clients, and their job effectiveness was suspect.  They were valuable in treating cots and blankets for bed bugs, but they occasionally used cleaning chemicals inappropriately, even dangerously.  The Property Director figured it would cost about $200,000 a year to replace New Start with paid staff, which was more than we could afford, and we decided to keep the free labor.  In retrospect, the exercise seemed to confirm that New Start clients were, for practical purposes, doing the work of our employees.

New Start clients also appeared to me to meet the State’s definition of employees.  I checked with a labor attorney at our liability insurer who confirmed that reading of the law.  She advised that without client agreements to waive their rights, the stipulated value of the room and board was subject to payroll tax and workers were eligible for mandated benefits, including the workers’ compensation we did not pay.  The New Start clients’ compensation would also need to meet or exceed the legal minimum defined by the U.S. Department of Labor (DOL), the State of California, and, beginning in 2013, the City of San Jose.  The potential financial exposures amounted to nearly $100,000 for unpaid payroll taxes and close to $1 million for unpaid minimum wages.

At our one-on-one meeting the week before I was fired, I stressed to Jenny that this was a very serious problem that we needed to investigate, and she repeated her desire to see more research before contacting an attorney.  That afternoon I mailed my minimum wage complaint to the State Department of Industrial Relations, which does not accept on-line complaints. 

The issues posed potentially enormous liabilities for us, and other nonprofit organizations could face similar risks.  Downtown Streets built its business on cheap labor provided by homeless and very poor clients to fulfill various private and city government janitorial contracts.  In 1990 the DOL determined that the Salvation Army, which historically paid its client-employees as we did with “three hots and a cot” (three meals and a bed) should also pay them at the minimum wage rate[1].  Salvation Army responded by calling the client-employees “beneficiaries” and having them sign Beneficiary Agreements surrendering their right to minimum wages.  The DOL was not happy with that solution, which has been supported in the courts[2], but it let it ride[3]

Goodwill gets around the problem differently.  It takes advantage of the DOL’s Special Wage Certificate program that permits employers to pay employees with disabilities less than the minimum wage[4].  Goodwill and Salvation Army both contended they did not have employer-employee relations with these individuals who came to them for rehabilitation services, not employment.  Where the employment relationship is clearer, as in the case of Washington DC area companies that paid homeless individuals less than the minimum wage to conduct property evictions, courts have supported the workers’ rights to minimum wages[5]

On which side of the legal line we stood is open to debate in good or bad faith.  Our experience with the State on the residential licensing issue suggested that they would not step in quickly to shut us down because of a problem, but this time the exposure was clearly financial and potentially significant.  It would become clearer in time that not only did government agencies lack the resources or will to detect violations, they would stumble at investigating violations disclosed to them by whistleblowers.




[1] DePalma, Anthony.  “Salvation Army Is Told to Pay Minimum Wage.” New York Times. September 16, 1990
[2] U.S. Court of Appeals, Ninth Circuit, Williams v. Strickland, No. 93-17224,
[4] Hrabe, John.  “Goodwill Minimum Wage Loophole Will Shock You.”  Huffington Post. May 15, 2013 (updated July 15, 2013)
[5] Rubenstein, Abigail.  “Eviction Cos. Face Sanctions for Underpaid Homeless.”  Law360 April 5, 2011.

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