Defense Contractor Blackwater Draws Fire for Alleged Labor Abuses, Tax Evasion

March 12, 2008
Defense contractor Blackwater, which drew criticism last fall for the conduct of some of its contractors in Iraq, is being accused of tax evasion, illicit contracts and labor abuses.

Rep. Henry Waxman, D-California, who chairs the House Oversight Committee, sent letters to the Internal Revenue Service, the Department of Labor and the U.S. Small Business Administration on Monday, March 10, alleging that Blackwater was inconsistent and incorrect in categorizing its security guards as independent contractors instead of employees.

Waxman estimated in a committee report that the defense contractor avoided paying as much as $50 million in federal taxes and received more than $144 million in unjustified small-business contracts.

Companies that use independent contractors are treated differently from companies with permanent employees. Those businesses don’t have to withhold and pay payroll taxes, for example. They can also obtain federal contracts without bidding against larger companies. And they are not subject to the same labor and anti-discrimination laws as companies with staff employees.

Blackwater asserts that its guards, who are stationed in combat-heavy areas such as Iraq, are independent contractors who abide by company rules—but ultimately are not controlled directly by the company.

“Blackwater’s classification of its personnel is accurate, and Blackwater has always been forthcoming about this aspect of its business with its customer, the U.S. government,” said company spokeswoman Anne Tyrrell.

But the independent-contractor status seems to contradict previous positions by the company. For example, the estates of four Blackwater security guards who died in Iraq sued the company in 2005 for wrongful death. Fred Fielding, who represented Blackwater in the case, argued the guards were employees and limited only to workers’ compensation benefits for their deaths.

Blackwater CEO Erik Prince also has been quoted as saying the company has “tight control” over its security guards, which could overturn the company’s allegations that its guards are loosely controlled independent contractors.

Tyrrell said Fielding’s comments were in the context of the Defense Base Act, which governs workers on U.S. military bases abroad as well as on certain public works projects, and not for the purposes of IRS taxation. “The two are not inconsistent positions because it is possible to be an employee for Defense Base Act purposes but not be an employee for IRS purposes,” she said.

Waxman’s allegations are not entirely new.

In March 2007, an IRS field office in Vermont stated that Blackwater’s independent-contractor classification was inaccurate. Blackwater appealed that ruling, arguing that the decision should not be treated as precedent since it has not yet been upheld by the IRS national office.

In October, Waxman sent a 13-page letter to Blackwater CEO Erik Prince saying the IRS ruling showed that Blackwater had engaged in “significant tax evasion.”

Blackwater responded at the time that various federal agencies had been aware of the classification of deployed personnel, and that Waxman’s allegations rely “heavily upon a single letter from an IRS field office.” Blackwater said it set up its independent-contractor status based on accounting advice a few years ago.

The military contractor, which has been awarded more than $1.2 billion in federal contracts since 2000, was apparently able to skirt federal contract-bidding rules by claiming small-business exemptions (based on its limited number of staff employees), according to a committee memo released by Waxman.

Waxman also claims Blackwater has been able to evade a compliance review of affirmative action and discrimination rules by the Labor Department that began in early 2007. Blackwater declined to comply with that review, writing to the agency in July 2007.

Filed by Nicholas Rummell of Financial Week, a sister publication of Workforce Management. To comment, e-mail