Raw Deal from The Center for Public Integrity

At Wal-Mart and elsewhere, jobs provide few hours, little stability

Wal-Mart Stores, Inc. — 2012-11-25T10:23:07-05:00

Shoppers heading to Wal-Mart on Black Friday in search of deals will likely be met by protesting workers. The protestors, who are organized by the union-supported group OUR Walmart, are asking the nation’s largest private-sector employer for dependable schedules and full-time jobs for those who want them.

It’s a request that is sure to resonate across the retail industry. Although retail is a relative bright spot in the labor market with a growing number of jobs, the Center for Public Integrity recently showed that the positions often offer less than full-time hours and unpredictable schedules, which means less stability and smaller paychecks than in the past.

In some cases, workers are hired for “call-in” shifts, which require them to call their stores a couple of hours before they are scheduled to work to see if they are needed. This flexibility has been a boon to employers, who cut labor costs by calling in workers on busy days, like Black Friday, and keeping them off the payroll when business is slow. But for workers, is has meant the end of a dependable weekly paycheck.

SuperShuttle: A job or a business?

2012-05-18T12:56:29-04:00

Okieriete Enajekpo needs money.

It’s not that the Nigerian-born Maryland resident is unemployed.

But as a driver for the airport van service, SuperShuttle, he must pay the company upwards of $900 a week before he takes home any money of his own.

And going into his fourth day this week in January, Enajekpo is still more than $100 short of paying off his weekly debt and starting to earn cash for himself.

“People back home [in Nigeria] think, ‘Oh you’re in America so you must be doing well,’” he says. “They don’t understand.”

It wasn’t always like this.

Once, drivers of this ubiquitous blue-van airport shuttle service were full-fledged employees, earning a moderate (and dependable) hourly wage. But over the past 13 years SuperShuttle has transformed its cadre of drivers into so-called franchisees — what the company calls independent business owners. In doing so, SuperShuttle has shifted, in its own words, “hard to manage variable costs from the company” to the drivers, making “gross profits more stable and predictable.”

“It was too expensive and, frankly, almost all of our businesses were losing money,” says Thomas LaVoy, chief financial officer of SuperShuttle.

Some drivers say the shift has allowed them greater flexibility and a chance to start their own business. But Enajekpo and hundreds of SuperShuttle drivers across the country say the changes have done more harm than good — and in a series of lawsuits claim the company doesn’t allow them independence and is cheating its drivers out of wages and benefits they should be entitled to as employees.

“It's really a big racket,” says Mack Green, a Minneapolis driver who is also suing SuperShuttle. “It's a good company for someone in the company. But the way they have it operating, they could never lose, because the driver is responsible for everything.”

SuperShuttle disagrees. “We offer an opportunity to independent business people who want to be in business for themselves a solid foundation, a good company, association and the means with which to be successful,” says Judy Robertson, head of franchising at SuperShuttle. “How a franchisee operates a business really is dependent on a franchisee, their drive. But I believe we offer a good arrangement.”

Challenges to the model

Good or bad, SuperShuttle is not alone in its business model. Franchising is a growing sector. It added jobs three-and-a-half times as fast as the overall economy from 2001 to 2005, according to the International Franchise Association. Though it has struggled since the recession, the association projects the business sector to return to pre-recession employment levels this year.

This transformation of employees into franchisees and independent contractors has been going on for decades. But it has led to a legal problem known as employee misclassification. That is when a company classifies its workers as contractors or franchisees without giving them the required independence. When that happens, the worker loses some labor protections, and the company is exempt from tax payments such as unemployment and workers compensation — a financial loss state and federal government are feeling in their tax coffers.

Yet defining the boundary between legal franchisee or contractor and employee isn’t entirely clear. There’s no single definition of employee, which means that various state and federal regulators, and even the courts, may allow different standards for one company.

That’s certainly been the case with SuperShuttle. Federal regulators have largely stayed out the fray, with the exception of the National Labor Relations Board. In 2010, the NLRB’s regional office in Denver found that SuperShuttle drivers were employees. That meant drivers were allowed to unionize, and they are now in the middle of contract negotiations.

But two other groups of SuperShuttle drivers that tried to unionize were rejected. In a case from Dallas, an NLRB official determined the drivers were independent contractors. In Enajekpo’s case in Baltimore, the regional office did not reach that issue, finding that even if the drivers were employees, they had supervisory responsibilities and therefore could not unionize. Both cases are now on appeal.

A few state regulators have made small efforts to clarify the relationship. Two unemployment agencies, in Maryland and California, found that SuperShuttle drivers were employees and therefore eligible for unemployment insurance. SuperShuttle has appealed both cases.

This lack of action is why drivers have turned to the federal courts, but even there they’ve had little clarity. Though separate class action suits have been filed in New York, California, Florida, Arizona, Minnesota and Maryland, most have stalled because of a clause in the franchise agreement requiring drivers individually arbitrate their cases with the company. Cases in Florida and Arizona have already settled. A proposed settlement in New York suggests that, while the company won’t admit any fault, it’s willing to compensate drivers the amount of their franchise by arranging to sell it.

SuperShuttle declined to comment on the litigation but in court filings vigorously denies that it misclassifies workers.

A long day’s work

It’s still dark outside when Enajekpo, a 44-year-old father known to his friends as Ola, emerges from his townhouse in a modern cul-de-sac development in Prince George’s County, Md., on a recent Friday morning.

Dressed in slacks, a blue jacket and shirt imprinted with the yellow SuperShuttle logo, Enajekpo begins his morning routine.

Maintenance inspection. Check. Vehicle clean-up. Check. Next up: find the morning’s first job.

Sitting inside his still-frigid van, Enajekpo turns on his Nextel monitor to see what jobs are available this morning. Already, 32 vans are lined up at the airport waiting for passengers. Enajekpo knows it will be a long wait so he hopes to find a group heading from his neighborhood to the airport.

There’s one job at 7:25 a.m. for $64, just minutes from his house. He tries to bid for it but the monitor won’t let him.

“There’s no reason this job shouldn’t be popping up,” he says. “But this happens all the time.”

He shuts down the system, and reboots it, hoping the gig won’t disappear by the time he logs in again. This morning, he’s in luck.

But after he accepts the job, he finds it comes with a slight hitch: one passenger had a coupon, bringing Enajekpo’s take down to $60 because drivers must take all company discounts.

Still, Enajekpo doesn’t complain too much. Any money will help, especially this week when he already owes SuperShuttle $1,054.36. There’s a $197.59 fee to pay down his franchise purchase, a $179.20 fee for his van lease, $144.31 to cover insurance and a weekly $500 system fee for using the SuperShuttle reservations and equipment. He also has $33.35 in other fees SuperShuttle charges him for customer discounts or additional booking fees the company incurs when passengers sign up through third-party websites like Expedia. Enajekpo also owes SuperShuttle $79 from last week, when he didn’t make enough money to cover his debt. On top of all this, he’ll have a couple hundred dollars to pay the company in revenue sharing fees — 10 percent of fares for runs to the airport and 27.5 percent for runs from the airport, which includes an additional fee paid to the airport.

A world of debt

That’s just this week. Enajekpo’s debt began the day he signed up for SuperShuttle in 2004 and bought a 10-year franchise.

It wasn’t difficult. But it wasn’t cheap either. A 10-year franchise costs drivers between $15,000 and $40,000, depending on location, SuperShuttle’s Robertson says. At Baltimore-Washington International Airport, it costs $25,000.

The problem: virtually no driver has the money to pay up front.

So SuperShuttle, owned by the European giant Veolia Transportation, offers a financing system, usually over a seven-year period. It’s this loan that keeps drivers indebted to the company. The interest rates are fixed at a relatively high rate — between 12 and 15 percent, depending on the market — which means drivers can end up paying the company upwards of $60,000 by the time they’re done. (Baltimore drivers pay 15 percent interest.)

Drivers have several other costs. The first is the van. Many do not own one and instead lease a van from a SuperShuttle affiliate, Blue Van Leasing, where interest on the lease can go to 15 percent. Even if drivers do have their own van, SuperShuttle requires them to get a new one about every five years. Green, the Minneapolis driver, says he’d just paid off his van and was finally making money when SuperShuttle forced him to get a new one. “But it was a good, running van and it passed all these inspections,” he says. “They are in the business of selling vans.”

Drivers then rack up a weekly debt for the all-encompassing system fee, which drivers must pay whether or not they work. (They don’t get sick days or vacation days, but they can hire a relief driver to drive for them.) In Baltimore, that means drivers with a 10-year franchise owe the company a minimum $19,500 per year for the system fee alone.

Robertson, of SuperShuttle, says the system fee is important because most airports require SuperShuttle to make a minimum payment to the airport regardless of how much the company earns — an amount she says ranges from $200,000 at small airports to $1.4 million at Los Angeles International Airport.

These fees from franchisees all add up to big bucks for SuperShuttle. In Maryland alone, the company made about half of its 2010 revenue ($4.9 million) from unit franchise sales. Nearly all the rest came from reservations ($5.2 million), according to franchise disclosure documents.

This model has allowed the company to expand from 20 airports in 1999 to 33 airports in 2012, says SuperShuttle’s LaVoy. He says franchising has helped with turnover, once at 185 percent among drivers and now around 10 to 15 percent.

A pro or a con?

For some drivers, the arrangement works well. Pat Alden, 62, lives in Baltimore County, Md., and has been driving a SuperShuttle van since 2004. Alden started off as a relief driver for another franchisee and soon got her own franchise.

“I’m here because I want to be self-employed,” she says. “I chose this because of the flexibility.”

That flexibility is particularly important for Alden, who has spent most of her life running a series of small businesses. As a single mother of three — two with special needs — she often has to help her now-grown children with errands. Just the other week she was able to log in at the airport to wait in line for a job and still make it to the mechanic to get her son’s car fixed.

“I wouldn’t have been able to do that if it was a short wait,” she says. “So, is that a pro or a con?”

Sitting in her van on a recent morning she points out that even though she’d logged in at 3 a.m., she’d gone home to sleep. And while she’s still waiting in her van near the airport at noon, she’s going over papers for her mother’s estate. “So, am I really working now or not?” she says.

Alden estimates that, after expenses, she takes home around $30,000 a year.

“Nobody promises you how much you’ll make when you’re self-employed,” she says. But, she adds: “I feel fortunate that I’m not looking for work. Many people with all sorts of good degrees are unemployed. It’s a tough environment.”

Michael Adenugba, 53, a Nigerian immigrant, agrees. He began driving a SuperShuttle van eight years ago, but since he paid off his franchise he has a driver working it full-time and is leasing a Cadillac taxi run by SuperShuttle that he now drives instead.

“This is not a job that can make you rich — but just for you to survive,” he says.

A laundry list of rules

But drivers like Enajakpo and others who’ve filed lawsuits argue that the company makes it impossible for them to make enough and be independent.

The job certainly comes with a lot of no-can-dos. Drivers can’t use their van to work for any other company. They can’t advertise their services. They can’t refuse a job when they’ve been waiting for hours at the airport and only get one passenger.

There are also a number of musts. They must pay for their own gas and maintenance.

They must keep their van clean and it must look a certain way inside and out. (Which includes painting it blue with the SuperShuttle logo and putting in a laundry list of signs including one saying they accept credit cards and one banning smoking.)

They must wear one of several uniforms. Among the items they can’t wear: a sweater or baseball cap without a SuperShuttle logo.

And they do get penalized. When former Baltimore driver Fred Tinsley was cited on Sept. 17, 2009, for wearing “non-uniform items” including a “white shirt without a tie, shirt tail out, brown sandal type shoes,” he was given three days to comply or lose his franchise.

Too many franchises?

Some drivers also say it’s much harder these days to get enough work. They say that’s because SuperShuttle has been increasing the number of drivers, which hurts their ability to make money.

In Maryland, SuperShuttle had 62 drivers at the end of 2006 and by 2010 had 84. But its revenue has hovered around $10 million for the past few years.

SuperShuttle attorneys wrote in a letter to state regulators that it “does not knowingly or intentionally increase the number of franchisee-drivers beyond the level that it believes can be reasonably sustained over time.”

SuperShuttle’s Robertson adds: “I personally don’t believe that there’s a system set up that requires franchisees to spend an exorbitant number of hours per day working.”

But Enajekpo says that he’s seen the amount of work he gets slowly erode since he first started. It’s 8:30 a.m. when he drops off the two passengers at the airport from his $64 bid. He logs into the system to line up for the next run from the airport. He’s number 36 in line. So Enajekpo pulls up his van to a nearby Shell station and begins to wait.

“It’s going to be a while,” he says, pointing to a row of vans lined up at the same gas station.

Several drivers are sleeping inside their vans. “Some of them have probably been here since 3 a.m.,” he says. (Enajekpo also keeps a blanket and pillow in his van.)

Soon a red car drives by, slowly surveying each of the vans. It’s the manager who comes around to inspect drivers’ vehicles and uniforms, Enajekpo says.

The clock ticks slowly. At 4:10p.m., he’s finally called to pick up passengers. He gets two, and it’s dark again by the time he arrives home at 7:15 p.m. He looks down at the day’s tally: $150 earned in fares and $75 spent on gas.

The long fight

This lack of work is part of why Enajekpo began asking management to limit the number of new franchises.

Drivers across the country were also complaining about this issue. And in 2008, Tom Vitale, chief operating officer for Veolia’s On-Demand Division, wrote drivers a letter responding: “The only way for the company to provide all of this support which is critical to the success of your business as well as ours is to charge fees whether fixed or variable in nature. … The bottom line, yours and ours, is not going to change.”

Then, in 2010, SuperShuttle got a new contract with BWI, which increased airport fees from 15 to 17.5 percent of outbound fares — a difference drivers would have to make up. “We realize this change will be more of a financial hardship for many of you,” the company wrote in a memo to drivers, adding that it needed to raise payments in order to get the contract.

Enajekpo knew that would be hard. Though the company paid him $75,787.18 in 2009, after all his expenses and paying a relief driver Enajekpo was left in the red; His 2009 tax returns showed his income as -$2,665.

At the end of 2010, Enajekpo and colleagues took their case to the NLRB, arguing that they were really employees and should be able to unionize. When they lost, they turned to regulators: the Maryland Aviation Administration, (which spoke to the company but says it wasn’t responsible for labor oversight), the Public Utilities Commission (which says it didn’t have jurisdiction), the state Department of Labor, Licensing and Regulation (where the unemployment claim remains on appeal), and of course, federal court, where he finally settled with the company earlier this year.

John Singleton, a lawyer who has represented the group of drivers before state agencies and the NLRB says: “You’ve got a real problem here because you have different agencies of the state of Maryland, all designed to protect certain groups of people, failing to do their job.”

Enajekpo put it more bluntly in a letter to U.S. Attorney General Eric Holder. The state’s inaction has given the company, he wrote, “carte blanche freedom to exploit minority workers trying to eke a living and fulfilling part of their American dream.”

Correction: An earlier version of this story said that drivers for Super Shuttle earned a salary. In fact, these drivers were paid an hourly wage for each hour worked and not a flat salary regardless of the hours worked.

SLIDESHOW: A day in the life of a SuperShuttle driver

2012-04-22T00:03:01-04:00

Reporter Emma Schwartz documented a typical workday for SuperShuttle driver Okieriete Enajekpo.

On-call employment: Good for business, bad for workers

New York City,New York,United States — 2012-04-06T08:22:34-04:00

Like generations of college students, Caprice Taylor needed a job to help pay her school and living expenses. For the 24-year-old student of fashion merchandise management at the Fashion Institute of Technology in New York City, sales work at a retail clothing shop seemed like a good option.

Taylor was hired last year at Club Monaco, a high-end clothing and apparel retailer owned by Polo Ralph Lauren. But her scheduled shifts at the Manhattan store were not guaranteed. Instead, she was given call-in shifts, which required her to call the store two hours before she was scheduled to arrive to see if she was needed.

Most often, she was not.

For months, Taylor said, she arranged her personal life around work days, waiting in her apartment, only to call in and learn the store wasn’t busy enough. On some weeks, Taylor logged as few as six hours, not earning enough to keep up with her living expenses.

“It puts your day on complete hold,” Taylor said. “It pressures you.”

After four months of unpredictable paychecks, Taylor quit. She later found work at a Polo Ralph Lauren store that does not have on-call shifts. She was lucky to find it. Retail watchers say big-box stores and shopping-mall stalwarts are increasingly hiring workers for on-call shifts, a trend that cuts labor costs for employers, but leaves workers like Taylor struggling to get by.

The clothing and accessory retail industry is a relative bright spot in the moribund jobs market. Yet like Taylor, many workers are finding the jobs unpredictable at best, providing smaller paychecks and less stability than in the past.

From 2002 to 2011, the number of nonsupervisory jobs in the retail clothing industry rose 7 percent to 1.13 million, according to the Bureau of Labor Statistics. The industry declined during the recession, but the decline was not as dramatic as for the jobs market as a whole.

Despite the steady numbers, the quality of the retail sales positions is falling by at least one key figure — the average number of hours they provide. In 2011, nonsupervisory workers in the clothing retail industry worked an average of 22 hours a week, three hours less than in 2005. That drop in hours hit them in the paycheck.

Although average hourly wages rose by 40 cents to $11.47 during that time, workers earned an average of $248 a week, $22 dollars less than the pre-recession peak. For call-in shift employees, the situation is often far worse, said Carrie Gleason, director of Retail Action Project, a New York City retail worker advocacy group. The biggest problem with call-in shifts, Gleason said, is unpredictability. Employees can’t make reliable budget decisions because they don’t know how much money they will make each week, she said. And for parents, it’s difficult to find flexible daycare providers to work around call-in shifts.

While many have lamented the decline of traditional employment benefits, including paid time off and employer-sponsored health insurance, Gleason said call-in workers are struggling simply to make enough money to get by. They rarely are offered benefits, Gleason said, because they work too few hours and turnover is high. “It leaves workers scrambling and creates a situation where people are struggling along,” Gleason said.

Susan Lambert, a University of Chicago professor who studies hourly and low-income labor, said employers have an incentive to hire a large pool of workers and schedule call-in shifts based on demand. “It gives managers a lot of flexibility when you have a workforce that is hungry for hours,” Lambert said.

Pressure to contain labor costs is not new, but Lambert said it has increased since the recession. In addition to retail, on-call jobs are now common at hotels, airlines, in the package delivery industry, and even in some financial services jobs, she said. “This is so much bigger than it was 10 years ago,” Lambert said. “It’s becoming common practice for companies to have a large portion of their sales force on-call.”

For retailers, scheduling on-call shifts helps drive down labor costs, which Fred Hurvitz, a professor at Penn State’s Smeal College of Business, said can account for 40 percent or more of their total expenses. As brick-and-mortar retailers face stiff cost competition from online retailers and pressure to drive down prices, Hurvitz said, they are increasingly searching for ways to save. The cost of labor is one place they are looking to cut.

Workers and labor watchers say on-call shifts are on the rise, but the exact number is uncertain. The Bureau of Labor statistics has not looked at the issue since 2005, when 2.5 million workers held on-call jobs.

Ellen Davis, vice president of the National Retail Federation, is reluctant to call it a trend. Davis said the federation has no policy papers on the issue and that it hasn’t come up in meetings. “It’s not common enough that it has risen onto the radar,” she said.

At the Club Monaco store in New York where Caprice Taylor worked, a manager who declined to give her name said the store uses call-in shifts “depending on the needs of the store.” She declined to comment further. Calls to Club Monaco’s corporate office were not returned.

Hard on workers, call-in shifts a boon for business

Call-in shifts may cause instability for workers, but experts say they allow businesses to staff up when they are busy and staff down when business is slow.

Lisa Disselkamp, a private workforce management consultant in Richmond, Va., said modern scheduling systems can be linked to sales data, which gives managers the ability to fine-tune an optimum balance between customers and staffing. In the past, Disselkamp said, scheduling was done on paper, and managers allocated employee hours based on intuition and projected sales trends. “Payroll for a long time was just processing time sheets,” Disselkamp said. “Today these systems are very intelligent.”

Increasingly, managers begin their shifts by logging on to scheduling systems, or looking at messages the systems send to their smartphones, Disselkamp said. The most basic systems help managers determine if the current workload calls for additional or fewer workers. More advanced systems look at individual employee skills, cost, and availability, and determine the best choice to fill slots, sometimes only an hour or two before the workers are expected to arrive.

Disselkamp compared the rise of smart scheduling to the lean inventory trend in manufacturing, in which factories rely on regular delivery of materials from suppliers rather than filling large warehouses with supplies. Lean inventory allows manufacturers to cut costs by transferring financial risk onto suppliers. In lean scheduling, Disselkamp said, risk is transferred to the worker. “The employee takes the job without a committed schedule of hours. That’s where the risk is,” she said.

There are no laws that require employers to provide a minimum number of hours. However, Disselkamp said lean scheduling can backfire on employers if taken to extremes, because turnover will rise, adding to training costs.

Call-in shifts not just for high school students

In 2011, the department store Macy’s phased out call-in shifts. Instead, it began advertising for “flex team” jobs, which allow employees to log on to the scheduling system and choose available shifts, after full-time and part-time employees are scheduled. Beth Charlton, a Macy’s spokeswoman, said the move “works to the advantage of most associates. They are students, moms, and people who want to work part time. It accommodates their schedules.” If a student has exams, for example, Charlton said, a job on the team allows the flexibility to take a week off to study by simply not signing up to work shifts. However Charlton said flex team workers are not guaranteed a minimum number of hours.

In 2011, the Retail, Wholesale and Department Store Union negotiated a five-year contract with Macy’s on behalf of 4,000 workers at four stores in the New York City area. Union spokesman Dan Morris said Macy’s new scheduling system was an area of contention during the negotiations. As part of the contract, full- and part-time workers retained their status and their hours. The contract does not cover the flex team.

On-call schedules can benefit some students and other flexible workers, but experts say it’s outdated to think the majority of part time workers are people looking for extra spending money. H. Luke Shaefer, a professor of social work at the University of Michigan, said the long stretch of high unemployment led employees to take jobs they might not have considered in the past. Shaefer said in 2009, the last year the data is available, 45 percent of part-time workers were primary wage earners in their families.

But even for workers who provide only part of family’s income, on-call shifts can be a struggle. In 2011, 25-year-old Sheena Dixon found a job working a call-in shift at Levi’s in Manhattan. Dixon, who lives in the Bronx with her mother, a nursing assistant, contributed rent and grocery money and bought clothes for her sister, a high school student. At Levi’s, Dixon said she made $9.25 an hour, but often worked between four and 12 hours a week. She didn’t stay long.

“For me to do all of that just to get paid what I used to get paid when I was 14, that didn’t work for me at all,” she said. Asked what she plans to do next, Dixon said she is looking for a new retail job.

FedEx fails to deliver for drivers

Fedex Corporation — 2012-04-02T12:40:44-04:00

Gary Terrio used to work for himself driving lost luggage from the airport in Manchester, N.H., out to the owners’ homes. “Working with my own business I could deliver whatever I wanted,” he says. “If it was something that was ridiculous, I could say no.”

When he and his wife started a family, he started looking for something more lucrative and stable. He heard that FedEx Ground drivers in the shipping giant’s home delivery division bought their delivery routes and worked them as their own business, which sounded pretty good. He could earn more and still be his own boss.

“And is that how it panned out?” Terrio laughs. “It was nothing, nothing, nothing of what they said.”

Rather than making his own schedule, he had to be at the package terminal for pick-up at 6:00am FedEx Ground paid by the delivery, not the hour, and assigned the roster of packages each day. If Terrio delivered the package outside the window of time that FedEx assigned or if a customer complained, his paycheck got docked. He had to buy his own FedEx specified truck and financed and insured it by refinancing the mortgage on his house. After all the expenses and deductions, he says he’d be lucky to bring home $500 a week. “I would have loved to have been just an independent contractor,” he says. Instead, “I felt like an employee.”

You might think it’s easy to know the difference between an employee and an independent contractor. It’s not. The distinction sits in a stubbornly murky corner of the law, and workers, employers and governments have a lot riding on the outcome. Meanwhile the number of people who are working but not considered employees continues to grow.

Employees are eligible for a host of legal benefit and protection programs that governments run and regulate. Employers must pay into those programs on behalf of “employees,” but not “independent contractors.” The murkiness comes in when someone calls a worker’s status into question, often when a worker and employer disagree over what benefits are due. There is not one single, legal definition for “employee” or one central government agency that decides a worker’s status. Different federal agencies regulate different aspects of employment, and often apply distinct tests to make the decision. State agencies may use other measures still.

Supreme Court Justice Hugo Black wrote in a 1968 opinion that “there is no shorthand formula or magic phrase that can be applied to find the answer,” and, for at least as long, lower courts have bemoaned the difficulty of deciding these cases.

The confusion is so entrenched that in the case of the IRS — which calculates the federal tax employers owe based in part on how many employees they have — there is a federal law prohibiting the service from issuing clearer guidelines for distinguishing between employees and independent contractors. Legislation introduced in Congress as recently as March 1 aims to address these issues, but historically, similar bills have not made it very far in the legislative process.

Terrio felt like he was taking all the risks of being a contractor without being able to exert control over the work. Some of his fellow drivers agreed and in 2005 sued, arguing that in reality they were employees and that FedEx’s treatment of them violated federal overtime and state labor laws. The case is still ongoing.

Increasingly, businesses have been shifting to contractor workforces to save money and reduce regulatory exposure. Critics say the model is so alluring that some businesses find ways to intentionally “misclassify” employees as independent contractors. When that happens people lose legal rights, governments lose tax revenue, and businesses gain an unfair advantage over competitors who pay the extra costs to treat their workers as employees. Federal and state governments have started coming down harder on businesses for misclassification, but without a clear definition for employee, how much of the problem can they really solve?

The right to a Ron Paul bumper sticker?

If Terrio had been working as an employee, the Department of Labor would ensure that he earned overtime pay and could collect workers’ compensation if he had gotten hurt on the job. Anti-discrimination protections would have prevented any of his fellow drivers from being terminated just because they were Latino, a woman, or 52-years-old. As an independent contractor, over 10 percent of his pay went to Social Security and Medicare taxes. As an employee, FedEx would have split that bill and contributed to a state unemployment insurance fund that Terrio could draw on if he lost his job. Independent contractors don’t get any of it.

Once, Terrio’s infant son was too sick for daycare. His wife couldn’t get time off so Terrio had to strap him in the front seat of the truck. An employee whose child has a “serious health condition” would generally be entitled to time off under the Family and Medical Leave Act.

Rich Farrell, a New Jersey FedEx Ground driver and medic in the Army National Guard, was deployed overseas for six months. FedEx terminated his contract and refused to let him come back; a move that would have been illegal if he had been classified as an employee.

Tony Marcellino, a FedEx Ground driver in California, died on the job in a traffic accident. His family couldn’t collect death benefits under California's Workers' Compensation Act that families of employees receive.

While foregoing benefits, Terrio wasn’t getting the freedoms he expected as a contractor, either. He got frustrated when he wasn’t allowed to put a Ron Paul sticker on the truck he’d refinanced his house for, or run personal errands in it without masking all the FedEx logos. “What does it matter if I stop at the store and pick up groceries?” he says. “It’s my truck.”

The government doesn’t regularly count independent contractors. The last time they did, in 2005, contractors represented up to 7.4 percent of the workforce, or 10.3 million people, up from 6.7 percent, or 8.3 million, in 1995. Observers agree that the number has likely grown since.

Denise Drake, a management-side attorney in Kansas City, Mo., says “We absolutely see employers using as many different staffing arrangements as possible to get their jobs done in the best and most cost-effective manner possible,” Drake says. “This means there has been, and likely will continue to be, a big increase in the use of temporary employees … and independent contractor arrangements.”

Catherine Ruckelshaus, legal co-director for the National Employment Law Project, says businesses can save 30 percent substituting independent contractors for employees. She sees the growth of independent contractors in the workforce running hand-in-hand with increased misclassification. “The independent contractor abuses have been rising for a while. Even before the recession it was really kind of a surge,” Ruckelshaus says.

A Labor Department study from 2000 audited companies in nine states and found that up to 30 percent had misclassified employees. Between 2007 and 2010, New York state alone identified over 50,000 cases of misclassification, assessing over $21.5 million in taxes and over $4 million in fines. The Labor Department study estimated that every 1 percent of the workforce misclassified as an independent contractor cost federal unemployment insurance funds $200 million.

A FedEx spokeswoman says the company stands by its independent contractor model because it “gives us a flexibility to be competitive in the market.” It’s a flexibility FedEx has gone to great lengths to keep. A 2010 audit from the Montana Department of Labor Insurance of FedEx Ground’s operations there shows one way the company keeps workers as contractors.

The audit found that FedEx Ground would advertise on its website for temporary drivers. FedEx conducted an interview and if they decided to hire, the driver would complete paperwork at the FedEx terminal or online for an outside temporary employment agency. The agency, not FedEx, would issue paychecks. “A few of these drivers were already employees of FedEx in other capacities,” the audit said. Montana ruled those drivers ought to have been classified as FedEx employees.

Rather than comply with the audit determinations, FedEx settled with the state for $2.3 million, admitting no wrongdoing, and adjusted its business operations there. Meanwhile, a spokesperson for the company says that FedEx has continuing relationships with three different temporary agencies nationwide, and uses them “at any point that there is an operational need.”

Montana is not the only state that has looked into FedEx Ground’s employment practices. FedEx’s 2011 annual report says the company is involved in “numerous” lawsuits and audits. Losing those disputes could entitle drivers “to the benefit of wage-and-hour laws,” the report says, and could force FedEx to change their independent contractor status. If that happens, the report warns, “labor organizations could more easily organize these individuals, our operating costs could increase materially and we could incur significant capital outlays.” Drivers at FedEx’s main competitor, UPS, belong to a union.

Definition derby

Terrio’s lawsuit illustrates how complex the wrangling over “employee” status can get.

His suit was not the only one active against FedEx. In fact it was one of 42 separate drivers’ suits coming out of 27 different states. To streamline the litigation they were all rolled together into one federal courtroom in Indiana. In December 2010, the judge announced that drivers in lawsuits covering 23 states were properly classified as independent contractors, but drivers from three other states should have been employees. The case is now on appeal.

So the Indiana court found employment status distinctions among the drivers even though they were doing identical work in different states. To make matters trickier, some drivers were getting different answers from the Indiana court than they had previously gotten in their home state. While Terrio was fighting FedEx in federal court, the state of New Hampshire audited their operations in 2008 and found hundreds of state labor violations. As in Montana, FedEx settled admitting no wrongdoing. They wrote the state a check, but did not reclassify the drivers as employees. Instead, they now require drivers in New Hampshire to incorporate as businesses before they can buy delivery routes.

The Indiana decision also ruled that drivers in a California suit were independent contractors even though a landmark decision in a California court granted drivers employee benefits from FedEx in 2006.

Stickier still, while the litigation focuses on FedEx’s labor practices, the IRS has already blessed the drivers’ contractor status for tax purposes. After auditing FedEx’s 2002 filings, the service calculated a tentative assessment of $319 million in back tax, penalties and interest for misclassifying the drivers, but withdrew the case in 2009, letting the contractor designation stand.

The criss-crossing categories reflect the haziness in state and federal law over how “employee” gets defined.

“There is nothing definitive,” says Ann Hodges, a labor law professor at the University of Richmond’s law school.

The IRS, for instance, uses a 20-part common-law test that focuses on how much control the employer has over the work. Scoring 11 out of 20 doesn’t guarantee a victory, and no single point clinches. The Department of Labor uses a 7-point test focused on the “economic reality” of the worker’s dependence on the employer. The National Labor Relations Board uses something in between. Many other government employment tests are variations on one of those themes.

At the IRS the confusion is not an accident, it’s the law. The 1935 Social Security Act set up a trust fund for retirees financed by employers contributing an amount equal to a set percentage of each employee’s pay and withholding a sum from each employee’s check. The IRS hadn’t had to distinguish among workers before, but the statute did not define “employee.” The IRS had to glean its 20-point test from court decisions. That worked until the 1970s when the IRS kicked up its misclassification enforcement. When a major tax reform bill came up in the late ’70s, a coalition of lobbyists representing industries built around a contractor workforce — trucking, real estate, construction and direct sales like Mary Kay — saw an opportunity to get the IRS off their backs.

With help from then-Rep. Dick Gephardt and then-Sen. Bob Dole, they condensed the 20-part IRS test into a single law, but couldn’t get it approved. Instead, Congress passed a temporary measure while, theoretically, better language would be crafted. It specifically prohibited the IRS from publishing regulations “clarifying the employment status of individuals for purposes of the employment taxes.” Rather than replacing the temporary law, Congress made it permanent in 1982.

The 1982 law goes further than just banning a clearer definition. It includes a provision that says that if the IRS ever audits a company and doesn’t find any problems with employee misclassification, it can never demand that the same business change its employment practices in a later audit even if it finds misclassification the second time around. FedEx was able to avoid $319 million in back taxes under this provision.

After 1982, the issue mostly hibernated. “There’s been very lax enforcement by federal and state government agencies that has contributed to a comfort zone for employers to increase their use of independent contractors,” says Richard Reibstein, an attorney in New York City who helps businesses write independent contractor policies that will withstand regulatory scrutiny.

In 2006, the Government Accountability Office released a report on misclassification and renewed government interest. The next year then-Sen. Barack Obama sponsored a bill that would repeal the 1982 ban on the IRS defining employment, but it died. On March 1 this year, both the House and Senate introduced another round of bills to free the IRS from the 1982 law, but similar bills have been killed in every Congress since 2006.

More attention or more confusion

The recession has focused the attention of cash-starved governments on the issue. “The governments need money and they look at this as revenue,” says William Weissman, a tax attorney in California. “I also think there’s a push in the current administration to create a safety net for everyone. So if you want people in the system, you’ve got to collect the taxes.”

What Obama could not do legislatively, he’s attempted to do through his agencies. His Department of Labor budget for fiscal 2013 proposes $10 million for state grants to combat misclassification and $4 million for new federal investigators. The Labor Department is hoping to add 35 more full-time employees to investigate misclassification. The department has also announced information-sharing arrangements with 12 states.

The IRS has begun allowing companies that voluntarily reclassify independent contractors as employees and pay 10 percent of what would have been owed the previous tax year to avoid other penalties. The IRS refused repeated requests for information on how many businesses had signed up for the program.

States have begun ramping up regulation, too. A new California law, for instance, includes civil penalties up to $15,000 per misclassified employee and up to $25,000 per willful violation.

“There’s a lot of intentional misclassification going on and we would all agree, whatever your party, that that is wrong,” Reibstein says. He worries, though, that this new run of regulation will hurt businesses that make changes out of fear or have to fight off costly enforcement actions and lawsuits.

Weissman says “a simple brightline test would likely be more useful,” than tougher penalties, but that administration-side enforcement is easier than waging a political battle in Congress for a uniform definition.

“Whether that uniformity would wind up tougher or weaker is a political choice,” says Harold Datz, former chief counsel at the NLRB. Interest groups on both sides — from the unions to the U.S. Chamber of Commerce — are wary of a definition that would go against them.

Russ Hollrah, executive director for the Coalition to Preserve Independent Contractor Status, says “I think current law is fine.” The exemption for businesses with a clean prior tax audit “works very effectively.” As for a change that might provide greater clarity, he says, “It depends on the clarity you get.”

Matt Capece, who works for the president’s office of the United Brotherhood of Carpenters and Joiners of America, says “For us in the construction industry, Jesus Christ could write the definition of ‘employment’ and we’d have a problem because the unlawful practices are so ingrained,” he says.

Construction firms that treat their builders as employees, he says, often “face the double indignity of losing jobs to the cheaters,” whose savings on labor allow them to underbid the competition. “Then they see their tax rates going up to cover the people who don’t pay” for unemployment insurance and workman’s compensation, he says.

Capece doesn’t like the term misclassification. “I refer to it as the ‘M’ word,” he says. “What we see is payroll fraud.” He’s heartened by the state escalations and sees the IRS ban on guidance as a “straitjacket,” but for him, enforcement is the game.

The construction industry is a frequent target for state enforcement. In January, Massachusetts’ attorney general extracted $400,000 in unpaid wages and penalties, and more than $141,000 for Massachusetts’ unemployment system from contractors under Pulte Homes, one of the nation’s largest builders.

“Frankly every time we talk about this issue, the other side paints a picture of a husband and wife sitting at a kitchen table with statutes spread all around them, and they can’t figure out how to classify their workers, and they make a mistake, and the government comes in and severely punishes them,” Capece says.

In fact, sitting at Marie Washington’s kitchen table in a rented townhouse in Owings Mill, Md., she is still trying to sort out what she and her husband could have done differently to avoid the employee misclassification lawsuit they’re stuck in. Her husband, Darian, runs Washington Home Installation, which subcontracts out jobs from the company that manages home deliveries for BestBuy.

He pays his installers by the job, but says they pick how many deliveries they want to do, which order in which they want to make them and if they want to come in the next day. In March 2011, a former installer sued the business saying he was denied overtime pay even though he regularly worked 70-hour weeks. In an affidavit, the installer describes having far less control over the work, meaning the lawsuit will involve heavy fact-finding.

Marie maintains that the independent contractor relationship was clear. When they found out about the lawsuit, the Washingtons discovered that because of the uncertainty of employment lawsuits, many lawyers require a hefty down payment — often as much as $10,000 — before they’ll take a case. It was then that Marie says she realized, “We’re really going to have to exhaust all our financial resources.” When they got married, the plan was for Marie, 25, to finish college and build her own career, but that’s been put on hold.

“Even now there’s not clarity,” she says. “I’ve looked at the IRS website, at the state website — there are no answers.”

Meanwhile, the Washingtons worry that if they lose, other former employees will come after them for overtime pay, and they may be vulnerable to other liabilities, too.

“If we’re wrong in all this,” she says, “then what about the government?”

Correction (Apr. 2, 12:35pm): An earlier version of this story identified Pulte Homes as the target of penalties from the Massachusetts attorney general, but it was contractors of the company that were fined.

Raging against the foreclosure machine

2013-01-22T15:55:48-05:00

Like millions of stories from the great recession, this one begins with homeowners struggling to keep up with a mortgage payment they simply couldn’t afford.

By 2009, the adjustable interest rate for Cassandra and Bernard Gray’s Durham, N.C., home loan had spiked to more than 12 percent. “I didn’t know if we were going to be on the street or in a shelter,” Cassandra recalls. “We couldn’t afford groceries. It got pretty bad.”

They were thrilled to sign up for a modification plan with their loan servicer, GMAC Home Mortgage, Cassandra Gray said.

The modification lowered their payment from $1,128 to $768 per month. But after three months, GMAC began returning their payments, the Grays claim in a complaint filed with the North Carolina Commissioner of Banks.

GMAC customer service representatives told them there was a “computer glitch” and that the problem would be resolved. Instead, GMAC twice started a foreclosure action.

GMAC claimed it had no record of any payment being received. The Grays have submitted bank statements that appear to show GMAC returning the $768 payment — several times. GMAC has since assessed more than $20,000 in interest and fees.

“I thought I was doing the correct thing” by obtaining a loan modification, Cassandra Gray said in a recent interview. “But I came home one day and there was a foreclosure notice on my door and a sign in my yard. I called constantly, but it was as if the dots were not connecting.”

A North Carolina clerk of court recently dismissed the foreclosure on grounds that GMAC had not properly demonstrated that it had standing to bring a foreclosure. But once GMAC gets its documentation in order, the loan servicer can foreclose again.

GMAC said it could not comment without borrower consent. The Grays did not sign a form authorizing the lender to talk about their case. But the lender did say that it is “working directly with the borrower to address their claims.”

Since 2007, nearly 9 million homes have been lost to foreclosure, according to data from RealtyTrac. About 4 million are currently in default on or in some stage of foreclosure. Some of these homeowners saw their payments skyrocket, some lost their jobs, and some bought a more expensive home than they could afford.

But many, like the Grays, say that their foreclosures or defaults were triggered by an error made by the mortgage servicing company. Common errors include late fees generated through questionable accounting and imposed without notice, excessive charges for property inspections and maintenance, and inflated or unnecessary attorneys’ fees.

Many homeowners who have tried to correct what seem to be simple accounting mistakes say that the servicers — often, an arm of a major bank — are unable or unwilling to help them resolve even the most basic problems.

“Every time I would call I’d get a different person,” said William Allen, a retiree near Baltimore who is fighting a Bank of America foreclosure. “I worked on it nearly a year and it didn’t do me any good.”

Most banks and independent loan servicers now say that they have cleared the decks on systemic problems that led to the errors and that they now make it much easier for homeowners to easily resolve their problems with bank representatives.

Federal regulators also say they have done their part: last year, Bank of America, Wells Fargo, JPMorgan Chase and other big servicers agreed to give more than 4 million borrowers who were in some stage of foreclosure between Jan. 1, 2009, and Dec. 31, 2010, the option of an independent audit of their loan account.

But veterans of the foreclosure wars tell a different story. More than four years after reports of these kinds of errors began bubbling to the surface, homeowners are still fighting to fix servicer mistakes that threaten their homes, they say.

“Almost all loans in default have something wrong with them,” said Tara Twomey, a lawyer at the National Consumer Law Center who recently completed a study of the servicing industry.

Negotiations over a proposed $25 billion settlement with the states over the use of robo-signers to speed foreclosures and other servicing mistakes are ongoing. California rejected the proposal Wednesday.

So why are things such a mess?

Much of the blame can be directed at a foreclosure machine created during the housing boom to deal with the mad rush of mortgage applications. The automated system prizes efficiency over customer service, makes frequent errors in the administration of troubled home loans, and, according to one study, pays servicers more for foreclosures than loan modifications.

“They don’t want to spend enough money to not make mistakes,” said Kurt Eggert, a law professor at Chapman University, who testified about servicing errors at a Senate hearing in 2010 and has written extensively about the industry.

Machine created to feed Wall Street

Many of the problems in the modern loan servicing business can be traced back 30 years to the invention of the mortgage-backed security.

In the early 1980s, the wizards on Wall Street learned they could convert humdrum home loans into financial instruments — a process known as securitization — enriching themselves as investors gobbled them up. By the early 2000s, securitization was standard practice among all of the largest lenders.

Most home loans are bought by Wall Street banks or by Fannie Mae and Freddie Mac, bundled together and placed into pools of 5,000 or more. They are then sliced up and sold as securities. Mortgage servicers bid on the rights to manage these loan pools before they are sold to investors.

Often, the servicer is a branch of the same Wall Street bank that created the investment. Bank of America, which acquired Countrywide’s notoriously troubled loan portfolio (along with its legal headaches), is the biggest servicer, managing 12.5 million loans.

The basic job is straightforward: servicers collect payments and pass them along to the trust that represents the investors. They are also responsible for handling foreclosures. In exchange, servicers typically collect one-half of 1 percent of the value of the outstanding loans each year in fees.

For a $200,000 loan to a borrower with good credit, a servicer might collect about $50 per month, with income dipping slowly as the balance of the loan drops. Servicers also make money from the “float” — interest earned during the short time the servicer holds the loan payment.

During the boom years, from 2002-2007, when few loans defaulted, profits soared, with margins averaging about 20 percent. Lenders with big servicing arms made piles of money from originating loans, packaging them for sale to investors, and then at the back end, from collecting fees from investors to service the loans.

Eventually, the wheels came off. Securitization encouraged lenders to stop caring whether the loans they were making were sound. Mortgage giants like Countrywide approved as many loans as possible knowing that Wall Street would purchase them, no matter how toxic.

The bankers, in turn, packaged the securities and sold them with gold-plated ratings to investors such as large pension funds and foreign banks. When the lending market dried up, so did new servicing contracts. Defaults and foreclosures soared.

But rather than hire and train enough employees to personally manage troubled loans in a way that minimizes foreclosures and encourages loan modifications, servicers entrusted management of troubled loans to old computer software that legal experts say isn’t up to the task.

The end result is a system with little accountability and a whole lot of angry homeowners.

It is impossible to know how many loans have been subject to wrongful fees and accounting errors, but foreclosure war veterans say the number is high.

Jay Patterson, a forensic accountant who has examined hundreds of mortgage loans in bankruptcy or foreclosure, said that “95 percent of these loans contain some kind of mistake,” from an unnecessary $15 late fee to thousands of dollars in fees and charges stemming from a single mistake that snowballs into a wrongful foreclosure.

Invalid charges

By September 2005, New Orleans homeowner Dorothy Stewart and her since-deceased husband had filed twice for bankruptcy protection and were having frequent problems keeping current with the payments on the small home they bought six years previous.

On Sept. 12, agents working for Wells Fargo Home Loans generated two “broker price opinions”—estimates, basically, of the value of the Stewart home. As loan servicer, Wells Fargo was in charge of collecting payments and managing a default or foreclosure if the borrowers fell behind.

A charge of $125 for each opinion was posted to the Stewart’s mortgage account. There was only one problem — Jefferson Parish, where the home was located, was under an evacuation order and closed to all but emergency personnel, thanks to Hurricane Katrina.

In an April 2008 ruling, Elizabeth Magner, a U.S. bankruptcy judge in New Orleans, rejected the two charges as invalid. She also disallowed 43 home inspections, 39 late charges, and thousands of dollars in legal fees charged to the Stewarts’ account.

Almost every disallowed fee was imposed while the Stewarts were making regular monthly payments on their home, the judge said.

The charges were assessed under circumstances contrary to Wells Fargo policy and were “unreasonable under the circumstances,” she ruled, after spending months unraveling the complicated loan file.

Magner determined that Wells Fargo had been “duplicitous and misleading” and ordered the bank to pay $27,000 in damages and attorneys’ fees. She also took the unusual step of requiring the servicer to audit about 400 home loan files in cases in the Eastern District of Louisiana.

Wells fought successfully to keep the results of the audit under seal, and last summer a federal appeals court overturned the part of Magner’s ruling that required the audit. But two people familiar with the results told iWatch News that Wells Fargo’s audit had turned up accounting errors in nearly every loan file it reviewed.

Wells Fargo declined to comment on the Stewart case or the subsequent audit.

Problems occur everywhere

Magner, the New Orleans judge, has dug into the accounts of more than 20 borrowers in her court since the Stewart case and found mistakes in every one of them, she said in a recent interview.

“These are loans of working-class people who bought homes they could afford and whose loans were not administered correctly from an accounting perspective,” she said. “I think that these types of problems occur in almost every [defaulted] loan in the country.”

So far, the most muscular attempts to rein in mortgage servicer bad practices have come in U.S. bankruptcy courts, where many judges, including Magner, have an accounting background. Justices in New York, Texas, Mississippi, Louisiana, North Carolina, California, and Massachusetts have sanctioned servicers for abusive practices.

In a 2010 ruling, David Houston III, a U.S. bankruptcy judge in Aberdeen, Miss., ordered American Home Mortgage Servicing Inc. to pay borrower Glen Cothern’s legal expenses due to its “egregious” conduct. The judge noted the “obvious mental anxiety, stress, and frustration” Cothern suffered when the servicer charged him for insurance he didn’t need, triggering two wrongful foreclosures and a customer-care experience that the judge described as “Kafkaesque.”

Stephani Humrickhouse, a federal bankruptcy judge in Raleigh, N.C., ordered Ocwen Financial Corp. to pay more than $70,000 for incorrectly reporting the mortgage of a couple as being in foreclosure. Ocwen still had not repaired the borrowers’ credit more than two years after they brought the accounting mistake to the servicer’s attention, the judge noted.

Due, in part, to the efforts of federal bankruptcy court judges, the U.S. Supreme Court amended bankruptcy rules to require servicers to include “an itemized statement of the interest, fees, expenses, or charges” with any claim they make in a bankruptcy filing involving an individual debtor. That rule went into effect December 1.

Phantom default

When a borrower defaults on a loan, servicers are still on the hook for making monthly payments to investors.

This would seem a strong incentive to do everything possible to help homeowners avoid a default, which is usually what investors want. But the system isn’t necessarily set up that way.

Servicers can charge fees for late payments, title searches, property upkeep, inspections, appraisals and legal services that can total hundreds of dollars each month and can all be charged against a homeowner’s account. Servicers have first dibs on recouping those fees if a foreclosed home is sold at auction, meaning they usually collect no matter what.

These fees can be lucrative. In 2010, Ocwen reported $32.8 million in revenue from late fees alone, representing 9 percent of its total revenue.

Before Countrywide imploded, late fees reportedly covered the company’s entire servicing operating costs, leaving its servicing fees and float as pure profit.

Christine Jackson, an Indiana consumer lawyer and retired Internal Revenue Service fraud investigator, said accounting mistakes are often to blame when modifications fall apart.

The problem she sees most often is when the loan servicer fails to advance the due date on its computer to reflect the new due date on the loan modification. So a homeowner might make her last payment under the old mortgage in July, and start making new, lower payments on a modified loan in September.

But the mortgage servicer mistakenly applies the first payment to the August balance. Because the payment amount under the modification is less than what the borrower previously paid, the computer assesses a late fee.

Late fees then continue to accumulate whether they are appropriate or not, eventually triggering a default. Jackson—who is fighting what she claims are wrongful insurance charges on her own home loan—calls this situation “phantom default.”

“The simplest mistakes can take 18 months to two years to correct,” Jackson said.

Servicer was wrong, wrong and wrong

One of the most searing rebukes to a loan servicer came last year from Judge Diane Weiss Sigmund, a federal bankruptcy judge in Philadelphia who sanctioned HSBC and its attorneys for failing to check whether computer-generated documents in a bankruptcy case were true before submitting them to the court.

The documents were wrong about the value of the home, the amount of the monthly payment, and falsely stated that the homeowners, Niles and Angela Taylor, had missed payments that they had actually made, the judge concluded.

“The thoughtless mechanical employment of computer-driven models and communications to inexpensively traverse the path to foreclosure offends the integrity of our American bankruptcy system,” Sigmund wrote. A U.S. district judge reversed the sanctions she imposed, but eventually a federal appeals court reimposed most of them.

Alan White, a professor at Valparaiso University Law School who has written about foreclosures, said he doesn’t think that there is any “evil intent,” but rather “neglect.”

“They are unwilling to devote the resources,” he said. “The technology used with servicing hasn’t kept up with complexities of modifications and foreclosures.”

Kathy Holler, a consumer activist in Pennsylvania, disagrees.

“It is by design,” she said of servicer errors. “You never see credit unions doing this. The servicers take unsuspecting people and put them out on a financial tightrope.”

Kept in the dark

William Allen and his wife Ann, a garrulous elderly couple, are fighting to keep their home in a picturesque mill town near Baltimore where they raised six children. Their troubles began in 2007 when a third-party service they hired to pay down their loan faster missed a single payment.

In a federal lawsuit filed earlier this year, the Allens claim they were not aware anything was amiss until a year later when they received a letter from Bank of America, which had recently purchased the servicing rights on their loan, demanding $2,752 to bring the loan current.

Their normal monthly payment was just over $900. No one at Bank of America ever alerted them that there was a problem with a payment, the Allens claim. Nor were any of their many attempts by phone to resolve what they say seemed like a minor accounting mistake successful.

The Allens allege that Bank of America saddled their account with more than $6,000 in unnecessary fees and charges stemming from misapplied mortgage payments, home insurance they didn’t need, and a wrongful foreclosure, violating federal law and servicing guidelines set by Fannie Mae, which owns their loan.

Bank of America did not respond to requests for comment, but in a court filing said that the default fees are justified because the Allens missed several payments.

William Allen said he suffered sleepless nights and a flare up of his diabetes as he sought to resolve a problem he didn’t understand.

“We ain’t never sued anybody in our lives,” Ann Allen said. “We just want this all to go away.”

‘Rolling default’

One of the accounting errors that the Allens allege that Bank of America made in calculating their loan balance was the misapplication of their mortgage payments to late fees the servicer had assessed.

An accountant who reviewed a partial loan history at the request of iWatch News said that the servicer appears to have improperly paid itself $601 for fees it had assessed on one occasion and $45 on three other dates. Fannie Mae and Freddie Mac servicing guidelines (page 301-2) say that payments on loans made after 1999 must be applied first to any outstanding interest and principal before a servicer can pay itself any late fees.

“They have these rules, but servicers universally ignore them,” said O. Max Gardner III., a North Carolina bankruptcy attorney. Payment application order is important because when a servicer deducts fees first, not enough is left over to cover the monthly bill.

This can trigger what consumer lawyers call a “rolling default” as fees and charges snowball until the servicer decides to foreclose. (Some banks have argued in court that loan agreements between borrowers and lenders entitle them to collect late fees first.)

A recent academic study found that mortgage servicers can make more money from a defaulted loan in some instances than they can from a healthy loan, or even from modifying a home loan.

Adam Levitin, a professor at Georgetown Law School and Twomey with the National Consumer Law Center, concluded in a recent article published by the Yale Journal of Regulation that a loan kept in default for a year or two can prove more profitable to a servicer than a typical healthy, performing loan.

The “cost-plus” structure, they write, gives the servicer “an incentive to levy as many fees as it can, as [those fees] will be paid off the top of the foreclosure sale proceeds.”

“The potential incentive misalignments from this form of compensation are so severe that it is prohibited for most federal government contracts,” the authors write.

Loan servicers that responded to requests for comment say there is no financial incentive for them to pursue a foreclosure.

“It’s generally in the servicer’s best business interest to keep loans performing and out of default,” said Paul Koches, the general counsel for Ocwen, a large subprime loan servicer. “Consequently, it's usually good business to take advantage of any opportunity to modify a delinquent homeowner's loan into a sustainable modification, and do so as efficiently as possible.”

JPMorgan Chase, one of the four big bank-owned servicers along with Bank of America, Wells Fargo, and Citigroup, says that it concluded that modification is a better alternative by about $2,600 per loan [page 50]. The servicers also said they have taken big strides in better servicing the loans of customers in default or foreclosure.

Wells Fargo said it hired an additional 10,600 “home preservation” staff since last year, and it now assigns one employee to work with a customer on a modification from beginning to end. Ocwen said it has invested $150 million to build a servicing platform that minimizes foreclosures and hired hundreds of additional staffers to help people stay in their homes.

It has also modified 250,000 home mortgages, a rate significantly higher than the industry average, the servicer said. GMAC Home Mortgage said it created a “single point of contact” team in 2010 to work directly with borrowers who are struggling to make payments and to help them file a loss mitigation application.

But consumer lawyers say that muddled financial benefits for mortgage servicers help explain why the government’s much-heralded Home Affordable Mortgage Program (HAMP) has been such a disappointment. HAMP was intended to help 3 million to 4 million financially struggling homeowners avoid default, but as of the third quarter of 2011 fewer than 900,000 borrowers had received a permanent modification on their mortgage.

Nationwide problem

The problems with wrongful foreclosures have drawn the attention of government regulators and law enforcement officials.

President Barack Obama pledged in his state of the union address Tuesday to create a special unit of state and federal prosecutors to “expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.”

The president said “this new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”

Obama also pitched his newest plan to stem foreclosures, an expansion of a plan to allow homeowners to refinance at historically low rates.

On Dec. 7, the Treasury Department announced that it would withhold payments through HAMP to JPMorgan Chase and Bank of America for the third straight quarter because neither servicer has fixed problems the government found.

The Treasury Department warned it would “permanently reduce” payments owed to Chase unless the problems were fixed by the first quarter of 2012.

Meanwhile, the mortgage market remains in historically rotten shape. Foreclosure rates dropped sharply at the end of 2011, in part because of increased scrutiny, but home seizures may jump as much as 25 percent in 2012 as banks push through delayed foreclosures, according to RealtyTrac.

Last April, the nation’s largest loan servicers agreed to stop pursuing foreclosures on loans that have been approved for modification and to address a laundry list of other bad practices as part of a deal with the Office of the Comptroller of the Currency.

The OCC recently said that that “work is under way” on the actions necessary for the servicers to live up to their promises. Those promises include applying payments in the proper order and new procedures for “promptly considering and resolving borrowers’ complaints, including a process for timely communication of the resolutions.”

Consumer advocates and some in Congress have raised doubts about the scope of the audit, which would exclude millions of borrowers with troubled loans; the independence of the auditors; and whether the process, which is now underway, will provide measurable relief for homeowners who have battled a wrongful foreclosure.

Cassandra Gray, and most other homeowners interviewed for this story, said that communication with their loan servicer has been anything but timely, and processes for resolution anything but clear.

It is this feeling of helplessness, coupled with the fear of losing their most prized asset, that homeowners say is the worst part of the experience.

“When I talk about it I get emotional,” said Cassandra Gray, who is waiting to see if GMAC brings another foreclosure action or tries to settle the case. “I can’t think about it. I can’t think about my home no longer being my house. I have a child with special needs. I don’t know where we would go.”

Tax gift to the rich

2012-01-01T06:00:01-05:00

Todd Dagres, a prominent venture capitalist and independent movie producer, earned $3.5 million in 2003, and paid not a cent in federal income tax.

The IRS challenged the math, and sent Dagres a bill for $981,980 in back taxes, plus $196,369 in penalties.

So Dagres lawyered up. His attorneys waived one lucrative tax break to exploit an even better one, and claimed victory in the case in March.

In the course of the dispute, Dagres offered five years of his tax returns as evidence in U.S. Tax Court. His testimony, tax forms and other documents offer a rare glimpse of how wealthy Americans work the angles to keep from paying taxes.

Dagres earned $58.5 million over those five years — ranking him among the richest 0.1 percent of Americans. During that stretch, the statutory rate for taxpayers in his income bracket was as high as 39.6 percent. But because of an array of tax breaks, Dagres paid 20 percent of his total income.

Dagres, 51, is not alone. While American working families earning under $100,000 pay, on average, about 35 percent of their taxable income in payroll and income taxes their wealthier counterparts — those who earn above $1 million a year — pay less than 30 percent.

The trend has gotten quite pronounced in recent years, especially for the very, very rich who, like Dagres, earn most of their income from investing and can exploit the low rates on capital gains. The average tax rate for the 400 wealthiest Americans was 29.3 percent in 1993, but dropped to 18.1 percent in 2008, according to the latest IRS statistics.

During that time, the combined taxable income of the top 400 soared from $16.3 billion to $91 billion. The richest 10 percent of Americans now control 70 percent of the country’s wealth.

In an era of rising income inequality, mammoth budget deficits and proposed cuts in defense and federal assistance programs, the taxes paid by rich folks like Dagres are a topic of national debate. Billionaire Warren Buffett fueled the controversy when he publicly deplored that his office receptionist and other employees pay taxes at higher rates than he does. Buffett didn’t release his tax returns, but said his annual tax rate, including payroll taxes, is 17.4 percent.

Federal taxes are “regressive,” the Congressional Research Service reported in an October study. “The average tax rate decreases as taxable income increases.”

“A large proportion of millionaires pay a smaller percentage of their income in taxes than a significant proportion of moderate-income taxpayers,” the CRS concluded.

There is more than revenue at stake. Since the days of Woodrow Wilson, Americans have used progressive income and estate taxes as leveling forces to preserve economic opportunity and forestall the formation of a homegrown plutocracy. But the recent concentration of wealth at the top, and a decline in economic mobility in America, has revived concerns that the American Dream is fraying.

In 2008, the Pew Charitable Trusts assembled a nonpartisan task force to assess the economic promise of America. Analysts from liberal think tanks like the Brookings Institution and the Urban Institute joined conservative scholars from the Heritage Foundation and the American Enterprise Institute. “The view that America is `the land of opportunity’ doesn’t entirely square with the facts,” the Pew report concluded. “Inequalities of income and wealth have clearly increased, [and] the opportunity to win the larger prizes being generated by today’s economy has not risen … and has, if anything, declined.”

In neighboring Canada, or countries like Sweden, Denmark, France and Germany — poster children of the European welfare state — a young man or woman, starting out with pluck and a dream, has a better chance of claiming success than in the United States, the scholars found.

Wrinkle in the Tax Code

At the heart of the Dagres case is a $2 billion-a-year wrinkle in the tax code known as the “carried interest” tax break. It permits wealthy hedge fund operators, venture capitalists and other private equity managers to treat their pay, for tax purposes, as a return on an investment instead of as a salary.

By doing so, they pay taxes at the 15 percent capital gains rate instead of the 35 percent rate on ordinary income. It is one way that millionaires like Dagres end up paying taxes at the same rate as struggling middle class families.

“This nonsensical loophole is deeply unfair at a time when working families are struggling,” said Sen. Carl Levin, D-Mich., in a speech to the Senate in June. “If you are a hedge fund manager, your job is to manage a hedge fund. The income you receive for that job is no different than the income a waitress receives for waiting tables, or a janitor receives for scrubbing floors. The idea that the income of millionaire fund managers should be taxed at a lower rate than that of their staff or other workers is an absurdity.”

After graduating from Trinity College in 1982, and picking up a master’s degree in business at Boston University, Dagres joined and prospered in the fast-growing financial services industry. He was one of thousands of bright young Americans lured to the sector, which more than doubled its share of U.S. corporate profits since 1980, from 15 percent to a high of 33 percent in 2003, and now employs 6.5 million people.

The capital in the private equity market — where managers raise funds to buy or invest in new and existing businesses — soared from roughly $5 billion to $1 trillion in this period. At the same time, thousands of new hedge funds — private entities using complex trading strategies — sprang into existence, managing another $1 trillion.

On Wall Street, firms increasingly focused on the creation, sale and trading of complex financial products. Bonuses and other compensation soared — the average almost doubling that of the nonfinancial sectors in the American economy.

As a venture capitalist, Dagres fulfilled a classic economic purpose, raising money from investors to bankroll entrepreneurs and incubate new firms. The rewards could be spectacular: in 2000, Dagres earned $44 million while a partner in a Boston venture capital firm, Battery Ventures. He had a network of knowledgeable sources in the booming tech sector, and a keen eye for talent and a promising idea.

Dagres was an early investor in Twitter and struck gold with hot new firms like Akamai Technologies Inc. and Qtera Corp. In the Qtera deal, he later told the Tax Court, he made $800 million for his investors, off a $15 million investment. He was listed on the Forbes “Midas” list of the top venture capitalists in America, and branched off into the movie business, as a producer of the films “Transsiberian” and “Pretty Persuasion.” The vanity license plate on his luxury Mercedes s55, the Boston Globe reported, read “VENCHA.”

The compensation plan at Battery was typical of private equity firms. Dagres acted as a “general partner.” He would work his sources, spot an opportunity, conduct research and solicit money from wealthy clients, who came together as “limited partners” in a venture he managed and administered. Battery collected management fees, big enough to give Dagres a multi-million dollar salary, but the big payoff came if the investment succeeded. Then Dagres and his firm would get 20 percent — the “carry” or “carried interest” — of the profits.

“It’s a performance-based business,” Dagres told the court, when his case came to trial in 2009. “If we perform well, we’re compensated well. If we don’t perform well, we’re not.”

The treatment of carried interest is a legacy of 20th century partnership law, crafted with small businesses in mind in the years before the financial services industry became a behemoth. Today, it represents a significant loss of tax revenue. Closing the carried interest loophole would yield $20 billion over the next decade.

It certainly saved Dagres hundreds of thousands of dollars. In his 2000 tax return, Dagres listed $40,579,415 in capital gains and $3.6 million in salary, interest and dividends. The Bush tax cuts, which reduced the capital gains tax from 20 to 15 percent, had not yet taken effect, so his total effective tax rate was 21 percent — about that of a middle class family.

Defenders of the carried interest tax break say that the work of hedge fund managers and other investment managers, in raising and allocating capital, makes a vital contribution to the American economy. Eliminating the tax break “would likely inflict large damage on the finance, insurance and commercial real estate sectors, diminish their entrepreneurial talent pool, and harm overall economic efficiency,” claimed Douglas Holtz-Eakin, a former congressional budget director, in a paper for the American Action Forum, a pro-business group led by prominent Republicans, in 2010.

When the Obama administration and members of Congress tried to do away with the carried interest loophole in the wake of the 2007-2008 financial crisis, the financial services industry fought back, and prevailed, and has continued its successful resistance even as lawmakers cast about for potential sources of revenue during the ongoing federal budget debate.

A Lobbying Juggernut

The industry is a political and lobbying juggernaut on Capitol Hill. Over the last two decades the finance-insurance-real estate sector, whose principals are the most likely to profit from the carried interest tax break, has been the single leading source of campaign funds for federal candidates, according to the Center for Responsive Politics. Donors from the sector have given more than $2.7 billion in that period to candidates for Congress and the presidency, favoring Republicans by a 55 to 45 percent ratio.

And when it comes to lobbying, the financial sector shares the lead with the health care sector, each of which has spent more than $4.7 billion lobbying in Washington since 1998, according to the Center.

In the Senate, the Democrats from New York and Connecticut have faithfully represented, and been rewarded by, their Wall Street constituents. New York Sen. Charles Schumer has raised $18.7 million from the financial sector over the last two decades, while former Sen. Chris Dodd, who helped write the latest financial regulatory legislation, collected almost $14.5 million.

The giving persists in the current election cycle, according to the Center, with more than $135 million already donated to candidates and groups in the 2012 election. Topping the list of individual donors are familiar, politically well-connected firms like Goldman Sachs (having given $2 million) and Bain Capital (with almost $1.8 million in donations). Democratic Sen. Kirsten Gillibrand, the newcomer from New York, has wasted no time tapping Wall Street for funds, collecting $1.9 million.

In the House, the financial sector has strong ties to the Republican leadership. Speaker John Boehner (having collected more than $1.2 million in the 2012 cycle), Majority Leader Eric Cantor ($903,000), Majority Whip Kevin McCarthy ($455,000), GOP Conference Chairman Jeb Hensarling ($525,000) and House Ways and Means Chairman Dave Camp ($527,000) are all favorites of the industry.

Cantor, who has collected $5.8 million — more than any House leader — from the financial sector in the last dozen years, is a particular champion of the carried interest tax break. His wife is a former Goldman Sachs vice president, and now works as a partner in a Wall Street private equity fund.

“If the deal goes bust: no money,” Cantor said, defending the carried interest tax break in September. “If the deal is successful there is a return [and] you pay the capital income tax. That is fundamental tax law in partnership tax law in this country. I’m not for changing that because I think that the capital gains tax … distinguished from ordinary income, is the essence of what we believe is an entrepreneurial-based free market economy. We want to provide incentives for investors and entrepreneurs to put capital at risk so we can create jobs.”

But critics of the loophole ask why a fund manager should be given the same low tax rate as an investor, who shoulders the risk of losing money and puts up the actual cash.

Lawyers who work for contingency fees don’t get a carried interest tax break. Nor do Hollywood actors who take a piece of the box office for their performance in a motion picture. Nor do authors or songwriters who rely on royalties. Nor do professional athletes, whose contracts include performance-based incentives. Nor do other business executives, whose compensation packages may include performance bonuses and stock options. Nor do bankers, stockbrokers, or financial planners.

“Most economists … would view at least part and perhaps all of the carried interest as performance-based compensation for management services,” then congressional budget director Peter Orszag testified before Congress in 2007. It should be taxed, therefore, “as ordinary income, as most other performance-based compensation is currently treated.”

Flip-flop

In a startling turn, with potentially far-reaching effects for the hedge fund and private equity industries, Dagres joined the critics of the carried interest loophole in 2003. When a business deal turned sour, and his financial circumstances changed, Dagres and his lawyers found it preferable to argue that carried interest was indeed mere compensation — and not an investment. The venture capitalist, in effect, sought to have his cake and eat it too.

The triggering event was the dot-com crash of 2000. One of the biggest and most spectacular casualties was William Schrader, the pioneering CEO of PSINet, who was known as “the father of the commercial Internet” for the fiber-optic network and Web-hosting centers that he built. Overextended, with his company collapsing around him, Schrader asked Dagres for a loan. The two had done business throughout the Internet boom years, trading information and sharing prime investment opportunities.

“It was very hard for me. I don’t ask people for favors,” Schrader told the Tax Court. “But I did it. And I told him it was hard. And he said that I could count on him for $5 million.”

Dagres was motivated by more than friendship. “I had spent a lot of time and effort building him up into a significant resource,” Dagres testified. “I didn’t want to lose him …. I felt that, if I loaned him the money, he would be indebted to me …. I was also concerned that somebody else might make the loan and gain his favor.

“I never imagined that he wouldn’t have $5 million to pay me back,” said Dagres.

But the loan didn’t save Schrader, and as time passed he found it difficult to keep up with the payments he owed to his friend Dagres. In August of 2003, lamenting in an email that he could not “keep working under the emotional weight of the unpaid and unresolved loan,” Schrader asked if there wasn’t a way for Dagres to forgive the remaining balance — more than $3.6 million.

Perhaps Dagres “can use the tax write-off,” Schrader suggested. He would give Dagres first shot at good deals in the future, he vowed. “This is just a rationalization, of course,” he conceded, “so that I don’t feel guilty that I end up becoming a pile of mush.”

Dagres agreed to forgive the $3.6 million, and his accountants and attorneys went to work to deduct the loss as an ordinary business expense. To reap the maximum write-off for the bad loan, his lawyers had to reposition Dagres as a businessman, not an investor. And here they faced a significant hurdle: the IRS, under the carried interest theory, had been giving Dagres the cut-rate treatment due an investor.

In 2000, because his income was taxed as a capital gain on an investment and not as ordinary business income, Dagres had saved $7.9 million in federal taxes, the IRS argued. He could not have it both ways.

“These activities are all investment activities and earned petitioner and his colleagues investment returns,” the government argued. “Investing is not a trade or a business.”

The government hit Dagres with a $1.1 million bill for back taxes and penalties. He decided to fight it out in court.

Dagres was a “professional,” not an investor, his lawyers contended. He was in a competitive business, and was paid “for the many services” he performed for the real investors. He was working just like a lawyer, for a contingency fee.

“A carry can be fantastically lucrative,” his lawyers acknowledged, but “none of this gain was attributable to petitioner’s own invested capital.” The risk had been borne by his “customers.

“Professional venture capitalists are service providers,” said attorney Joel Carpenter, when the case was heard in June 2009. The carried interest was merely compensation. “It’s that compensatory element, in the absence of significant personal investment, that distinguishes his business from the activities of an investor.”

Carpenter was persuasive. Dagres won his case. But the ruling by Judge David Gustafson must have sent a shiver through many a hedge fund manager, since it buttressed the arguments made by critics of the carried interest loophole.

Money management was a business, the judge declared, and the gains and losses could be treated as ordinary income. The decision seemed to open a door: Might the IRS or another federal judge reclassify the gains of carried interest as ordinary business income, subject to a higher rate of taxation?

“An activity that would otherwise be a business does not necessarily lose that status because it includes an investment function,” Gustafson wrote. “Bankers, investment bankers, financial planners and stockbrokers all earn fees and commissions for work that includes investing or facilitating the investment of their clients’ funds. Selling one’s investment expertise to others is as much a business as selling one’s legal expertise or medical expertise.”

Senate committee finds most 'trapped' offshore income is already in U.S.

United States — 2011-12-15T06:00:01-05:00

A select group of U.S. multinational corporations have been furiously lobbying for a tax holiday, they say, to bring more than a trillion dollars in so-called “trapped” foreign earnings back home and invest it in the American economy.

But a Senate report released Thursday shows the money is anything but trapped. Some of the richest firms have already brought hundreds of billions of dollars back to America, without paying U.S. taxes, and invested it in US banks, bonds, stocks and other assets.

The Senate Permanent Subcommittee on Investigations surveyed some of the best known U.S. multinationals and found that 27 of the cash-flush firms, including Apple, Google and Microsoft, had invested almost $250 billion in the United States.

“Those foreign earnings are not trapped or locked offshore at all,” said Sen. Carl Levin, the Democrat from Michigan who chairs the subcommittee. “About half of the so-called offshore funds were actually onshore.”

Some of the firms leading the lobbying for a tax holiday, Levin noted, have brought home almost all their “trapped” funds. Apple, Google and Microsoft, for example, have brought back from 76 to 100 percent of their offshore earnings, the subcommittee found.

As the Center for Public Integrity has reported, the multinational firms are lobbying for a tax holiday because the US has a higher corporate income tax than many foreign countries. Under current law, when a foreign subsidiary returns its earnings to the American parent company, it must pay the difference between the tax of the country in which it conducts operations, and that charged in the United States.

Rather than pay the U.S. corporate income tax, as domestic companies must do, many multinational firms leave the money on the books of their foreign subsidiaries. If they could return their earnings to their parent corporation without paying the U.S. tax, they contend, more money would be invested in new research and development and jobs here at home.

“The fact that foreign subsidiaries of U.S. companies have deposits in U.S. banks or in U.S. bonds does not mean that their American parent companies are able to deploy those funds in the US economy, said Abigail Gardner, a spokeswoman for WIN America, a coalition of firms pushing for the tax break.

Wall Street and government analysts estimate that US corporations carry some $1.4 trillion on the books of their foreign subsidiaries — and some $2 trillion on their books at home.

“They have gobs of cash,” Levin said. With bulging corporate coffers and low interest rates, said the senator, there is no rationale for giving a small segment of American firms a tax break that could cost the US Treasury from $40 billion to $80 billion.

Obama channels Roosevelt, seeks "fair shot" for Americans struggling in tough economy

2011-12-06T16:46:14-05:00

Seeking to channel the spirit of Teddy Roosevelt, President Obama skewered his ideological foes Tuesday for abetting and condoning a new Gilded Age of greed, economic inequality and vanishing opportunity for the working families of America.

“This is the defining issue of our time,” Obama told a crowd in Osawatomie, Kan., where Roosevelt laid out the progressive agenda in his “New Nationalism” speech of 1910. “This is a make or break moment for the middle class….At stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home and secure their retirement.”

Obama deplored how forces like globalization and computerization have combined with political gridlock to leave workers with lost jobs and less pay, while the top 1 percent has disproportionately prospered.

“The rungs on the ladder of opportunity have grown farther and farther apart,” Obama said. In the years after World War II, a child born into poverty had a better-than-even chance of climbing into the middle class. Today those odds have shriveled to one-in-three. “For most Americans, the basic bargain that made this country great has eroded.”

Republican National Committee spokeswoman Kirsten Kukowski told the Associated Press that the president was “desperately trying new slogans and messages to see what sticks because he can’t figure out how to sell his last three years of high unemployment and more debt.”

Indeed, the president placed the blame for the stagnant economy on avarice, Republican obstructionism and laissez-faire policies—not on any failures of his own economic policies during three years in office.

The “big banks” and “billionaires” and a “certain crowd in Washington” exploit leaky campaign finance laws, take advantage of tax loopholes and buy the services of lobbyists who work against the interests of average citizens, Obama said. He urged Americans to rebuild the economy “based on fair play, a fair shot, and a fair share.”

Fair play, fair shot, fair share: these are Obama’s terms for what Roosevelt called the Square Deal. The Center for Public Integrity’s iWatch News is investigating the Raw Deal that working class families have gotten at the hands of policymakers in Washington and big banks on Wall Street.

A few of CPI’s Raw Deal stories to date describe:

How wealthy corporations with a trillion dollars stashed offshore are lobbying for a “tax holiday.”
How the Republican candidates’ flat tax plans would affect struggling families.
An unemployed construction worker in North Carolina who couldn’t pay the orthodontist bill and removed his son’s braces with pliers.

Pain persists for the jobless, like the unemployed father who removed his son's braces with a pliers

2011-12-02T12:54:13-05:00

Dave Esmay made a good life for his family as a construction superintendent in North Carolina, managing commercial projects worth $15 million to $30 million.

Then came the Great Recession. In North Carolina, and many other states, the construction industry collapsed. And Esmay lost his job.

His family life was wracked by “stress ... from not having any money,” Esmay recalls. He cashed in his retirement account and sold his truck, and when the Esmays could not make the payments on their mortgage, they lost their home.

A daughter postponed plans for post-graduate study, and took work as a waitress.

Esmay couldn’t afford to keep paying the orthodontist, so he took his son’s braces off himself, with a pair of pliers.

For folks like Esmay, today’s federal unemployment report contains a mix of good and bad news.

Things are certainly not as awful as they were. Unemployment, overall, dropped from 9 percent to 8.6 percent. For Americans with college and post-graduate degrees, it stands at only 4.4 percent.

But the news from the construction sector, where Esmay saw signs of life this fall, was just slightly less tragic than it has been. Since peaking at the decade-high rate of 24.7 percent last year, the unemployment rate in the industry has decreased to 13.1 percent.

And for some classes of America — teenagers, minorities, and those without a high-school diploma — the specter of double-digit unemployment remains a stubborn presence in their lives. Indeed, unemployment among African-Americans actually rose in the last month, from 15.1 percent to 15.5 percent.

The welcome drop in the unemployment rate was fueled, moreover, by the despair of many job seekers. The Labor Department reported that 315,000 Americans stopped looking for work and simply left the workforce in November. The percentage of the population in the workforce is at a sorry rate of 58.5 percent.

Meanwhile, the number of long-term unemployed, those jobless for 27 weeks and over, “was little changed at 5.7 million and accounted for 43 percent of the unemployed,” the department said.

For working families, “America’s economic security is under challenge more than at any time in the last 25 years,” says Yale professor Jacob Hacker.

Hacker and a team of scholars studying economic insecurity for the Rockefeller Foundation reported last week that the percentage of Americans experiencing a major economic loss without an adequate financial safety net has leaped from 14.3 percent in 1986 to 20.5 percent today.

After months of scanning the Internet for openings, and watching even low-pay retail jobs go to younger men because, the companies said, he was over-qualified, Esmay finally got some promising job interviews this fall.

But the Great Recession has forever affected the lives of Esmay and his wife and four children.

“I’m 50 years old and back at zero,” Esmay says. “I could not have imagined this five years ago.”

It’s been three years, he says, “of hell.”