Removing a hidden barrier to affordable housing

Crain’s New York Business | August 5, 2016

Companies should be allowed to build projects without fear of fines and penalties resulting from the wage theft of subcontractors

Our political leaders in New York City and Albany have spent much of the past two years debating how to promote affordable housing. While 421-a and other incentive programs are important, the debate has largely steered clear of some of the hidden barriers to creating more affordable units.

One common-sense legislative fix would allow companies like mine to build projects without fear of fines and penalties resulting from the wage theft of subcontractors.

Under current law, certain projects require all construction workers to be paid a “prevailing wage” established by the federal, state and city government. That means the contractor or subcontractors who directly hire the workers, as well as the general contractor running the project, are responsible for ensuring that all workers of the subcontractors are paid prevailing wages—even though the general contractor has no direct relationship with the worker.

Unfortunately, not every subcontractor follows the law. You have cases where a company is hired to do drywall work, for example. While its contract requires it to pay all the workers on the job a prevailing wage, it passes only a fraction of that money on to the worker and pockets the rest. Or worse, you have subcontractors who actually pay the prevailing wage to the worker, but force those same workers to pay some portion of the money back—a “kickback” to the company—or charge them for expenses that aren’t permitted under the law.

Those cases are obviously reprehensible.  Any company that behaves this way should be punished to the fullest extent possible.

Today, when those cases arise, it’s not just the subcontractor that is punished. The general contractor is also fined for violations on the project even though they have no knowledge that the subcontractor was engaged in wage theft. Contractors submit false certifications to cover up their misdeeds.

Wage theft not only affects the workers but delays projects, costing private and public owners substantially. It also deters general contractors from pursuing prevailing wage affordable-house projects, diminishing competition, which will raise the cost of construction by creating an oligopoly where very few people control the industry.

No general contractor knows with absolute certainty that every subcontractor it hires will follow every law. So, what is a company like mine supposed to do to protect itself, its investors and the people doing the actual work to build these projects?

A good solution would be to require a contractor to pay workers via direct deposit. This would reduce potential wage theft. Because of an absurd ruling under current law, even in cases where workers are paid via direct deposit, if the worker withdraws money from their account and returns it to his employer—the subcontractor—the general contractor is held accountable for wage theft even though they have no knowledge or control over the workers’ deposited money.

It’s as if you own an ice cream stand with a partner and he robs a bank and you are held responsible even though you did nothing wrong. That makes no sense. The law should be amended to penalize only criminals.

Why does this matter for affordable housing? Unlike standard housing construction projects where the units will be sold or rented at market rates, profit margins are much smaller for affordable-housing projects where there are caps on rental rates. That makes it harder to attract developers and general contractors willing to take on these projects.

Allowing a company like mine to have peace of mind in exchange for setting up a simple way to ensure everyone working on one of my projects is payed the legally required prevailing wage will remove one of the hidden barriers to building quality, competitively priced affordable housing. That is a win for workers, a win for developers, a win for the general contractors, a win for taxpayers and a win for New Yorkers looking for affordable housing. More affordable-housing units will be built.

Joel Mounty, Crain’s

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