Feds cited Conduit Global’s parent company last year for violating minimum wage laws

March 23--On Jan. 22, Tennessee Gov. Bill Haslam led a rally in FedExForum alongside a giant screen that proclaimed: "1,000 New Jobs.''

Haslam and local leaders announced a call center would open in Shelby County, run by an outfit few had ever heard of: Conduit Global.

While state officials offered grants and lauded the call center for promising 1,000 jobs in a region starved for work, one key fact was overlooked in the celebration.

Conduit Global had repeatedly broken labor laws, including record-keeping violations and failing to pay overtime and minimum wage, according to the federal government.

Between 2009 and 2013, the New York firm shortchanged more than 14,000 people throughout the nation, the U.S. Department of Labor says.

The situation illustrates a broader trend.

In an era when economic developers throughout the nation eagerly hand out tax breaks to companies in the name of job creation, the process of vetting companies and negotiating with them often takes place in secret. Taxpayers sometimes know little about the companies they are backing.

Labor law

Conduit Global is a brand name for kgb USA, a New York firm founded by former <location>Wall Street executive Robert Pines.

Early on he called the business Knowledge Generation Bureau and latched on to kgb, also the name of the former Soviet spy agency.

Some years ago, kgb advertised a service called 542542 -- people could text questions to that number from their cellphones. A company website lists a few: "Why does ear wax turn brown inside of your ear?" "How to get southwest airlines boarding pass?" "What pill has az 012 printed on it and oblong white?"

The answers came from operators searching the Internet at home.

These operators, known as "special agents," were paid five to 10 cents per answer and often earned less than minimum wage of $7.25 per hour, according to court records. The company called them independent contractors, but U.S. Department of Labor officials argued they were employees subject to federal protection.

After a three-year investigation, the company agreed in January 2013 to settle without admitting or denying the charges. Back wages were paid to 14,568 current and former employees spread throughout the country. The back wages totaled $1.3 million -- making it one of the Department of Labor's biggest cases last year.

The settlement "was a decision based on risk to the business," said Jennifer Nellany, Conduit Global general counsel. "We didn't want to allocate any more resources to fighting it and we came up with a settlement that we thought was an acceptable amount based on the resources it was taxing in terms of internal resources and legal fees to defend the lawsuit going forward."

Taxpayer aid

Should a company cited by the U.S. government receive taxpayer support? That question was apparently not debated in public by Tennessee officials.

Tennessee's state funding board reviewed the Conduit Global project at a Feb. 5 meeting in Nashville and approved $2 million in subsidies, but there's no record in the meeting minutes that board members discussed the Department of Labor action.

And as late as Thursday, the state still refused to release some documents related to the subsidy deal, including one of two grant agreements and the company's application for funding.

An exemption in the state public records law allows the government to withhold records until a contract is completed, said Erin Holt, spokeswoman for Tennessee'sDepartment of Economic and Community Development.

State-level recruiters were aware of the U.S. Department of Labor action, said Clint Brewer, an assistant commissioner with the Tennessee economic development department.

"The company certainly didn't try to hide it," he said.

Landing Conduit Global

Several factors caused the state to move forward. "First of all, it was a very good project for Shelby County and for the city of Memphis," Brewer said. "It was a very high job count. Those jobs are needed."

He also said that the company does not plan to repeat in Memphis the "piecework" business model that got them in trouble. "That being the case, we felt comfortable moving ahead," Brewer said.

In Memphis, officials were not put off by the firm's actions.

"Some of our most important and successful local companies have run into issues," said Reid Dulberger, head of EDGE, the Economic Development Growth Engine.

While the Greater Memphis Chamber recruits companies, Dulberger's agency connects them to local subsidies, including property tax rollbacks. Conduit Global has not applied for EDGE tax breaks.

EDGE will check a company's background, but won't automatically rule them out if they've had problems.

"No one would say we shouldn't work with them," Dulberger said. "Other communities would love to have them."

Who is kgb?

Founded in 1992 as Infonxx, Pines began using spy references in advertising after the name changed to kgb. He is still chairman.

The spy connotation stuck when kgb and the state negotiated the Memphis project. Its code name was Project Moscow.

Today, kgb's major businesses include directory assistance services in Europe and customer service call centers like the one in Memphis.

In January 2010, the U.S. Department of Labor began investigating pay to kgb's "special agents" fielding questions.

"What made this particularly challenging was the fact that there were very high number of workers that were spread out throughout the United States," said Alfonso Gristina, who supervised the Department of Labor probe.

Gristina said many companies misclassify employees as independent contractors, and that this practice hurts the economy.

"It's an epidemic. It's a pandemic," he said, noting contractors aren't protected by workers' compensation, often don't pay into the Social Security system, and in some cases don't receive the minimum wage.

"And it is killing states, because employers, when they do this, are not paying into the various state funds: the workers' compensation fund, the unemployment compensation fund," Gristina said.

Tax Breaks

Very few states and cities withhold economic incentives from companies that have faced regulatory actions, said Greg LeRoy of Good Jobs First, a Washington-based group that criticizes subsidies.

While many states and cities set wage standards for the jobs they recruit, Tennessee does not. Clint Brewer, the state spokesman, said Tennessee factors in data such as the unemployment rate, the number of jobs and where the company is locating.

"But we don't pin a wage rate on the wall and say this is what we've have to hit," he said.

In Memphis, EDGE sets a standard of $10 per hour plus health insurance for companies seeking local tax breaks.

Conduit Global is offering a base wage of $9 per hour at the call center.

Low wages or not, Memphians responded to Conduit Global. Nearly 900 attended its job fair at the Cook Convention Center on Tuesday.

In a region hungry for jobs, only about 541,000 people are employed in Greater Memphis -- 52,000 fewer than when the recession began in 2007.

Dulberger said the heavy turnout for $9 jobs reflects the fact that many out-of-work people lack job skills employers are looking for.

He said economic development recruiters can't set high wage standards.

"Conduit Global is not going to offer more money to an employee because we have a higher standard," Dulberger said. "They'll simply go someplace else."

542542

As it prepares to open a call center in Shelby County, just beyond Memphis' city limits, Conduit Global is no longer being monitored by the U.S. labor department.

When the government recently changed rules that governed how customers could opt into the 542542 text message answer service, kgb discontinued it, said Nellany, the company attorney.

Conduit was considering doing so anyway, she said, "because it wasn't part of our growth strategy." Today's smartphones allow users to surf the web and research ear wax by themselves.

Gristina, the Department of Labor's supervisor on the kgb investigation, said he doubts the government needs to keep tabs on Conduit Global.

"I would say given that this was so visible, we're confident that employees would come forward if their compensation changes from legal to illegal," Gristina said.

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