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
[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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