Can an Illegal Foreign Worker Payroll Scheme Be Less Harmful than a Legal One?

By David North on August 15, 2019

This is a triple puzzler: Is it possible that a legal program for foreign workers could produce more in questionable benefits for employers than a criminal conspiracy?

Also, why do the unindicted contractors in this case get far more in illicit goodies, than the indicted alien middlemen?

And why are these two questions totally ignored in government documents and media coverage?

All of these questions arise from a federal indictment handed down on August 9 in Orlando, Fla., against three middlemen in a payroll fraud scheme. The lede in the Law360 coverage was:

The U.S. Department of Justice announced Friday that three men in Orlando, Florida have been indicted for allegedly engaging in a scheme that shorted IRS an estimated $5.3 million in payroll taxes.

As background, the Optional Practical Training (OPT) program gives employers an 8.25 percent discount if they hire foreign students who have completed their studies at U.S. colleges instead of citizen or green-card graduates of the same colleges, as we have written recently (see here and here). This is because of a legal fiction that allows the now-graduated foreign students to still be considered "students" and so they and their employers are exempt from paying payroll tax. This is terrible public policy, but legal.

In contrast, the three indicted scammers got only a 6 percent fee for their role as nominal "employers" in the Florida construction business. It is in this narrow sense — that 6 percent is smaller than 8.25 percent — that the illegal arrangement might be viewed as less harmful than the OPT program.

The three indicted are Gregorio Fuentes-Zelaya and Santiago Erazo-Zelaya, both illegal aliens from Honduras, and Dennis Barahona, a naturalized citizen from the same nation.

They acted as the nominal employers of construction workers, mostly illegal aliens, for a series of building contractors. This gave the actual employers, the contractors, the ability to shield themselves from their legal obligations to not hire the undocumented, from their legal obligations to pay the normal payroll taxes, and from the need to purchase workers' compensation insurance, as required by (in this case) Florida law.

For this, the trio — who do not seem to be good negotiators for themselves — deducted 6 percent from the workers' paychecks before they passed on the other 94 percent. The conspirators also managed to secure what looked like workers' compensation coverage for the contractors by seriously understating the size of the workforce and securing certificates for coverage at a few cents on the dollar for what should have been charged. As to federal payroll taxes, which support the Social Security and Medicare programs, no one — not the contractors, not the workers, and certainly not the indicted trio — paid a cent.

Let's look at who gained and who lost in this scheme.

The major winners were the contractors. In addition to not paying $2.65 million (their share of the $5.3 million in payroll taxes mentioned earlier), they also escaped millions in workers' compensation payments. The trio, according to the feds, got $1.4 million in fees. The workers, though denied workers' compensation insurance, in a sense traded the $1.4 million in fees for the non payment of $2.65 million in payroll taxes, so they came out uninsured but better off by $1.25 million ($2.65 million - $1.4 million).

And so who is in trouble now? The contractors have not been indicted and the U.S. Attorney's Office, appropriately, would not talk about pending investigations. Hopefully the contractors will be put on trial along with the trio and the illegal alien workers will be deported. The latter might happen, but I have seen no reports of it.

Meanwhile, the government is seeking to get the $1.4 million back from the three and a Land Rover belonging to one of the three — good luck on that.

The calculations above, with the emphasis on the contractors' ill-gotten gains, were not expressed as such in the government's documents, or in the media coverage.

And no one mentioned who was funding all of this — America's infirm and elderly who should have received, via the trust funds, the $5.3 million.

For more, see the PACER filing at case 3:19-cr-00121.