Many contractors who rely on an immigrant labor force utilize so-called labor brokers to avoid responsibility for unlawful or questionable employment practices. Although construction workers are directly employed and paid by the labor broker, the contractor usually maintains authority to hire, supervise, discipline and fire them. The contractor pays the labor broker a fee—typically 3% to 15% of total payroll—for supplying the workers.
In many cases, the labor broker is simply an individual with little or no construction experience or skills himself, and he performs no work at the job site. He is simply a man with a list of names of ready and willing workers. He usually takes care of soliciting workers, transporting them to the job site, and securing their lodging accommodations.
What makes the use of labor brokers attractive is that, in most cases, contractors can secure workers more cheaply through a labor broker than it would cost to hire them directly. How, then, is a labor broker able to make a profit? Typically, labor brokers curtail their labor costs by systematically violating employment and payroll laws, or by undertaking other unethical cost-saving measures. (Riley, Michael. "Labor Brokers Cut Costs, Corners." The Denver Post, Feb. 16, 2003.)
Please read news articles about specific documented situations involving some of these schemes and practices.
Labor brokers go by various names, including labor contractors, job contractors, employee leasing companies, second-tiered subcontractors, sub-subcontractors, et al. But the term that is gaining the most popularity throughout the industry is professional employer organization (PEO), probably because it connotes integrity and legitimacy.
Regardless of the nomenclature used, all of these companies serve the same purpose. Small- and medium-sized businesses of all kinds outsource to labor brokers to recruit workers. But the principal advantage of using a labor broker is that, for most purposes, it voluntarily assumes legal responsibility as the employer of record. Thus, the client can ostensibly shift liability for everything from administering the payroll and paying employment-related taxes, to providing health benefits and securing workers' compensation coverage. (But see, "Using Labor Brokers: The Legal Issues." AWCI’s Construction Dimensions, Aug. 2004–Vol. 33 Issue 2. This article addresses the common misconception that employer liability can easily be shifted from contractor-client to labor broker, and explains that these arrangements may expose contractor-clients to unexpected liability.)
The National Association of Professional Employer Organizations estimates that "the PEO industry grew a very robust $10 billion to $81 billion in gross revenues in 2010. (The industry defines gross revenues as the total of its clients' payrolls and the fees PEOs charge them for taking on their human-resource activities.)" About 700 PEOs covering 2 to 3 million workers are operating in 50 states.
The use of labor brokers has become especially prevalent in the construction industry. Many construction contractors who rely on an immigrant labor force utilize labor brokers to avoid responsibility for unlawful or questionable employment practices. Although construction workers are directly employed and paid by the labor broker, the contractor usually maintains authority to hire, supervise, discipline and fire them.
PEOs charge a service fee for taking over the human resources and payroll functions of the client company: typically, this is from 3 to 15% of total gross payroll. (See Sloan, Julie. "Cure Your HR Ills". Fortune, March 28, 2007.) This fee is in addition to the normal employee overhead costs, such as workers’ compensation coverage, unemployment insurance withholding, and the employer’s share of FICA.