This story is part of the series called “Contract to Cheat” published by McClatchy DC. The series tracks how several states fail to prevent construction companies doing public projects from misclassifying their workers as independent contractors 2014 a practice that cheats taxpayers out of billions of dollars each year and denies workers protections. Read the entire series on McClatchy’s site

On an overcast July afternoon, with the clock ticking on their lunch break, men in blue jeans and hard hats filed out of the four-story Fairfield Inn & Suites under construction near Interstate 270.

Jon Gould, a Carpenters Union job site investigator, stood in the parking lot of a nearby filling station and gazed at the half-finished motel. Three months earlier, on a hunch, investigators from Gould’s union had started videotaping the people building the motel.

The surveillance was taking place to answer a big question: Was Road Runner Construction, of Little Rock, Ark., the motel framing contractor, trying to get away with a practice known as misclassification? Repeated countless times nationwide, often with impunity, the practice enables dishonest companies to underbid honest competitors by categorizing employees as independent contractors—thereby dodging laws that require the payment of state and federal taxes.

Last year, Illinois toughened its employee classification law by increasing potential financial penalties for construction companies that wrongly classified workers as independent contractors.

Illinois and New York are national leaders when it comes to curbing worker misclassification. Their efforts were highlighted by a recent review of payroll records on large, publicly financed projects conducted by reporters for McClatchy and ProPublica, an independent nonprofit news outlet, in both states.

While North Carolina and other Southern states have misclassification rates on publicly financed projects approaching nearly 40 percent, the reporters in Illinois and New York combed through payroll records for dozens of projects and found not one instance of a company wrongly listing its employees as independent contractors.

It’s no accident. Illinois and New York have passed hard-nosed laws and formed task forces to take an aggressive tack toward employers who misclassify their workers.

By executive order, New York state created its Joint Enforcement Task Force in 2007, partly in response to a Cornell University study that showed nearly 1 in 10 audited employers in New York were improperly listing workers as independent contractors.

“I think the state of New York and the state Labor Department deserve a lot of credit for recognizing that this was a really big issue when they did,” said Linda Donahue, senior extension associate with the Worker Institute at Cornell University ILR School and a co-author of the study. “They didn’t let any moss grow. They got right on it, and clearly it’s made a difference.”

The difference can be counted in billions. Since its inception, the task force has uncovered more than 114,000 cases of worker misclassification, adding up to almost $1.8 billion in lost wages. Last year alone, the task force found more than $333 million in unreported wages.

A Task Force Plus Stiffer Penalties

The task force also conducts hundreds of random work site and “Main Street” sweeps, in which inspectors target a single retail plaza and inspect each business’s books. In testimony to the U.S. Senate in 2010, then-New York State Department of Labor Commissioner Colleen Gardner described one enforcement sweep that cost the state about $25,000 to execute but garnered more than $100,000 in additional taxes and penalties.

The Cornell researchers found misclassification especially rampant in the construction industry. Their study revealed that, before 2007, about 15 percent of the construction workforce in New York could be misclassified in any given year.

“It wasn’t just workers that were hurt by this,” said Donahue, “but also the businesses that complied, because they were being seriously underbid.”

The prevalence of the practice led New York’s Legislature to pass the Construction Industry Fair Play Act in 2010. The law strictly defines an “independent contractor” and places the burden of proof on the employer.

The law imposes penalties as high as $5,000 per misclassified worker, with the option to charge employers criminally for “willful misclassification.” This year, New York Gov. Andrew Cuomo signed the Commercial Goods Transportation Industry Fair Play Act, a similar law that targets trucking companies.

The fair play laws require work sites to post notices about the practice next to other legally required notices describing New York’s wage and labor laws. The notices have been so successful in increasing awareness and generating tips, the state Department of Labor’s next step is to require misclassification notices at every work site in the state, according to James Rogers, deputy commissioner for worker protection at the department.

All this enforcement makes business owners very reluctant to misclassify their employees willfully, Rogers said.

“We’ve been at it so long that if you put all that together along with the public’s awareness of the problem, there are few public works projects in New York state that’s going to be against the law,” he said. “We’re gonna find you.”

Enforcement Pays Off

Illinois’ crackdown on misclassification got a big boost in 2012 with the creation of a task force that consists of the state attorney general, the Workers’ Compensation Commission and the state Departments of Labor, Revenue and Employment Security. All share information about suspected violators and work together to ensure guilty parties pay up.

The changes seem to be working. Illinois is second in the nation in the number of misclassified workers detected per audit, according to the state Department of Employment Security. More than 9,000 Illinois workers were identified as misclassified last year, resulting in the collection of more than $2.3 million in unreported taxes.

Illinois’ and New York’s efforts to root out misclassified workers mean they capture larger shares of much-needed tax revenue and suffer lower rates of workplace injuries and deaths than states that ignore misclassification do.

The same alliances of unions and lawmakers in those states that passed laws to crack down on misclassification also made laws to encourage workplace safety. Employers who play by the rules on worker classification also are more likely to hire experienced, well-trained workers who know how to avoid accidents and injuries.

What’s more, Illinois and New York received a big economic boost during the Great Recession of 2008-09 because associated prevailing-wage laws—which require that contractors pay the usual hourly wages, overtime and benefits that most workers in an area receive—stabilized their economies when construction in the private sector suffered serious declines, according to several academic studies.

It’s not just strong state laws that are responsible for the high rate of compliance in Illinois. There’s also a big buy-in from county and municipal governments on the importance of ensuring that workers are properly classified and paid the prevailing wage, according to Bob Bruno, a professor of labor and employment relations at the University of Illinois at Urbana-Champaign.

And New York’s proactive policies don’t mean fraud is nonexistent there. In August, New York City officials discovered that a contractor overseeing a Harlem housing project was underpaying his employees by almost $300,000.

In New York state last year, 1 in 4 workers—nearly 2 million—were union members. The state’s strong union presence is another tool in combating worker misclassification. Donahue recalled an instance in which members of a bricklayers union recorded every worker coming in and out of a construction site. When they later looked at the official documents at the construction firm, only three workers were listed on the payroll.

“Construction unions were really stepping up enforcement,” said Donahue. “They send people to keep an eye out on this.”

The same holds true in Illinois, where 1 in 6 workers belong to labor unions and state inspectors work closely with union representatives to monitor and investigate companies suspected of wrongly listing their employees as independent contractors.

To make the case against Road Runner Construction, Gould and his team of investigators staked out the site in Pontoon Beach where the company is building the new Fairfield Inn. During regular day and night shifts beginning in April, the union reps videotaped the construction workers when they drove up in the morning from the nearby motel where they were staying, and then videotaped them when they left the job site at night.

“Sometimes they’d sit at the Taco Bell,” Gould said of his investigators. “Sometimes they’d sit at the McDonald’s.”

The union reps took down license plate information and learned the workers were from out of the area, Gould said. They watched as all the laborers were put up at the same motel, and learned from informal conversations with the men that they were all taking direction from the company and otherwise being treated as employees, according to Gould.

The presence of out-of-state workers on a job site represents a red flag to union inspectors such as Gould. The fact that these workers are brought in from hundreds of miles away is, based on past experience, a key tip-off for Gould that a project contractor may be engaging in dishonest practices, including misclassification and paying substantially less than the local prevailing wage.

Record searches showed that Road Runner isn’t licensed to do business in either Illinois or Arkansas. For Gould, that provided a key piece of the puzzle: If Road Runner wasn’t registered to do business in either state, then it couldn’t be documenting its workers’ salaries and payroll deductions with W-2 forms. Instead, they’d be relying on 1099 tax forms, which go to workers categorized as independent contractors.

“Once we knew that, we knew they were 1099-ing or paying cash,” Gould said.

In May, Gould turned over to the Illinois Department of Labor the evidence his investigators had compiled of violations they said they’d documented at the Fairfield Inn site. The state Labor Department later conducted its own on-site investigation, with state inspectors interviewing workers.

Neither Road Runner nor the site’s developer, Sam Patel, returned calls seeking comment. The Illinois Labor Department has declined to comment on where its investigation stands.

Fitzgerald reported from Illinois for McClatchy’s Belleville News-Democrat; Jones reported from New York for ProPublica. Email: mfitzgerald@bnd.com, ryann.jones@propublica.org.