Commerce Fraud Bureau to get new powers to investigate wage theft, other financial crimes

By: - May 25, 2022 2:26 pm

The Golden Rule Building in downtown St. Paul that houses the Minnesota Commerce Department. Courtesy photo.

Labor leaders are calling a bill that passed the state House and Senate on Sunday the most significant piece of legislation for combating wage theft since it was made a felony in 2019.

The bill (HF 3255), which is awaiting Gov. Tim Walz’s signature, gives the Commerce Fraud Bureau new powers to criminally investigate financial crimes along with more than $800,000 a year to hire five more investigators.

“This is a very big deal,” said state Rep. Zack Stephenson, DFL-Coon Rapids, who authored the bill in the House. “All across the state, white collar crimes are in desperate need of more enforcement.”

Until now, the Commerce Fraud Bureau has been restricted by law to insurance fraud investigations — a function of the department being entirely funded by a tax on insurance companies.

The new law maintains that at least 70% of the department’s work must continue to focus on insurance fraud, but allows the department to investigate all financial crimes with money appropriated from the general fund.

That puts new power behind the state’s ability to criminally investigate labor violations that are rampant in construction and hospitality — yet seldom prosecuted. Payroll fraud in the construction industry alone costs the state upwards of $136 million a year in lost tax revenue, according to one estimate by the Midwest Economic Policy Institute.

“Wage theft and tax fraud are business models,” said Adam Duininck, director of governmental affairs for the North Central States Regional Council of Carpenters. “When we see it in such a concerted manner, the only way to patrol that is with aggressive enforcement.”

The carpenters’ union has put its own resources behind investigating wage theft claims as a way to fight back against contractors who undercut union bids. As the Reformer reported earlier this month, the carpenters’ union organized dozens of workers who say they’re still owed more than $100,000 for their work on luxury apartments at the Vikings’ development in Eagan.

In 2019, Minnesota and Colorado led the nation in making wage theft a felony, with California following suit in 2021. The passage of these laws were heralded by labor activists as a turning point in ensuring workers are paid for their work by deterring employers from cheating them of hours, overtime pay and other compensation.

But since the law took effect in Minnesota, no employer has been criminally convicted of wage theft.

The main reason why not, according to prosecutors, labor leaders and lawmakers, is a lack of investigatory power.

State investigators with the Department of Labor and Industry do civil, not criminal, investigations. Following the 2019 wage theft law, Attorney General Keith Ellison set up a wage theft unit, but it too, only conducts civil investigations.

That means it has largely fallen to local police or county sheriffs departments, neither of which are well-equipped to conduct complicated financial investigations.

Stephenson, who also works as a prosecutor for Hennepin County, said he saw firsthand the skill of Commerce Fraud Bureau investigators and the benefit of expanding their focus.

“It can be hard for departments that are used to dealing with violent crime to deal with white-collar crime appropriately,” Stephenson said. “The cases often last a very, very long time and they’re often multi-jurisdictional.”

The state’s Bureau of Criminal Apprehension could conduct criminal investigations of financial crimes, but its focus is often consumed by violent crime and police killings.

“Admittedly, the BCA is stretched pretty thin with the increase in violent crime that we’re seeing,” said Matt Vatter, assistant commissioner of enforcement for the Minnesota Commerce Department.

Vatter said the new powers afforded to the Commerce Fraud Bureau will allow them to follow the various threads of their insurance fraud investigations.

“A workers’ compensation fraud case is rarely just workers’ compensation fraud,” Vatter said. “There’s almost always stuff (like) wage theft … that we don’t (currently) have the authority to investigate but is still incredibly important to the case. So that’s where we try to partner with other agencies who have the expertise and have the jurisdictional authority in those areas.”

The Commerce Fraud Bureau has gone after employers for exploitative labor practices through the side door of workers’ compensation insurance fraud when employers misclassify their workers as subcontractors to avoid paying taxes and benefits.

For example, the bureau investigated Ricardo Batres, who pleaded guilty in 2019 to labor trafficking and insurance fraud. He admitted to forcing people without legal work authorization to work for his construction company, sometimes in dangerous conditions that led to injuries.

By and large, though, treating labor abuses like wage theft as criminal matters is a relatively new phenomenon, says Terri Gerstein, a labor lawyer at Harvard Law School who has studied the rise of prosecutions of employers.

“There’s a whole range of violations that happen in the workplace that historically have been handled only civilly even though the conduct is comparable and the impact is comparable to or far worse than a lot of economic crimes that are routinely brought by prosecutors’ offices,” Gerstein said.

For example, it’s not uncommon for workers to be prosecuted for fraudulently claiming workers’ compensation or unemployment insurance, but employers are rarely charged for submitting fraudulent payroll records to skirt taxes.

Gerstein said the new law is a positive step forward in cracking down on often-overlooked workplace abuses.

“Having dedicated staff who are knowledgeable about the issues and are able to work alongside prosecutors to bring these cases is really essential,” Gerstein said.

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Max Nesterak
Max Nesterak

Max Nesterak is the deputy editor of the Reformer and reports on labor and housing. Previously, he was an associate producer for Minnesota Public Radio after a stint at NPR. He also co-founded the Behavioral Scientist and was a Fulbright Scholar to Berlin, Germany.