Employee Misclassification has become one of the fundamental pillars of the “race to the bottom” business model that is so prevalent in the American construction industry today.
To many people, it seems like a tactic too ridiculous to work: a company looking for a way to cut costs announces that its employees aren't actually "employees," but are instead "independent contractors" who just happen to work there full time. Therefore, the company isn't legally obligated to pay Social Security and Medicare taxes for them, or to provide them with workers compensation when injured, unemployment compensation when laid off, protection from discrimination or any other benefits.
Unfortunately, and especially in the construction industry, this business practice is being fiercely defended by those who advocate and perpetuate the “race to the bottom” mentality that does so much damage to our communities and our nation as a whole.
In fact, here is a direct quote from the Associated Builders and Contractors in their defense of the use of “independent contractors” in the construction industry:
“Independent contractors are an important contributor to the construction industry. Independent contractor relationships are often advantageous for all involved. The arrangement allows for independent contractors to have the freedom to choose their own schedule, affords business owners the flexibility to adjust staff demands with seasonal construction volume, and provides reasonably priced, quality products to the consumer.”
It may seem ridiculous -- but this mentality is affecting tens of thousands of construction workers across this nation, and aside from the damage it inflicts upon those workers personally, it's costing federal and state governments billions of dollars and preventing hard-working men and women from reaching the American Dream.
Put simply, employee misclassification takes advantage of the fact that the Fair Labor Standards Act requires companies to do things for their full-time employees that they would otherwise NOT have to do for independent contractors.
And because of that loophole, a fast-growing trend is afoot among employers to re-classify employees as “independent contractors,” for the expressed purpose of getting out from under many of their specific obligations as an employer under federal law.
When you think of an "independent contractor," you probably think of someone who works for many companies over the course of a year, on projects of fixed length -- not someone who has been working full time for a single company for years. But loopholes in current law allow companies to call those full-time employees "independent contractors."
We call it tax cheating, and it needs to be stopped.
For workers in America, one word can make all the difference in their well-being. That word is “employee.” Without such a designation, a worker is excluded from most of the basic benefits and protections provided in the workplace. Millions of workers now find themselves in that precarious position. When a worker is classified as an independent contractor, instead of an employee, he or she might be subject to huge back taxes because their employer did not withhold income taxes. They may also be denied Social Security and Medicare when they retire because taxes were not paid on their behalf. And, if they are injured on the job, they may not have access to workers compensation.
To be blunt, misclassification of employees is the legal tactic “du jour” for employers seeking an easy way to cut costs, because it lets a business off the hook for various payroll taxes and employee benefits. And when unscrupulous employers commit this type of fraud, it hurts more than their workers, it affects entire communities. Just envision two construction companies bidding on the same contract, and then consider what would happen if one of them paid taxes and provided benefits for its workers, while the other did not.
The end result is that responsible businesses who play by the rules are placed at an unfair competitive disadvantage by employers who misclassify workers as “independent contractors.” And when those responsible employers can no longer compete, then an entire local community suffers as wage and living standards are eroded, and the local tax base shrinks as well.
And the effects on the tax base are not insignificant. As a tax avoidance scheme, misclassification robs both the States and the federal government of precious revenue. Prior estimates from the Internal Revenue Service (IRS) indicate billions of dollars of taxes go unpaid every year because of misclassification.
A few years ago, a crackdown on employers in New York State found that numerous employers were paying workers off the books, and uncovered millions of dollars in violations, state officials said on Monday. In 15 enforcement sweeps, state investigators found $19 million in wages that were not reported to the state and $3 million in underpayments to workers. Investigators also uncovered nearly $1 million in taxes that had not been paid to the state’s unemployment insurance fund.
In their sweeps, which investigated 117 companies, state officials found that 2,078 employees had been misclassified as independent contractors. The task force also found 646 workers who were owed minimum and overtime wages totaling about $3 million.
In 2007, the state of Minnesota uncovered similar findings. An estimated 14 percent of Minnesota employers subject to unemployment insurance taxes – or 1 in 7 – misclassified at least one worker in 2005. According to the state, this estimate was overly conservative because it excludes employers that fail to register with the unemployment system.
For these reasons, America’s Building Trades Unions are supporting several federal legislative initiatives designed to address this issue. Included is the Taxpayer Responsibility, Accountability, and Consistency Act (H.R. 3408), that was introduced in the U.S. House of Representatives by Congressman Jim McDermott (D-WA). A companion bill was introduced Senate by Senator John Kerry (D-MA).
The Kerry/McDermott approach would amend Sec. 530 of the Revenue Act of 1978 – which is commonly referred to as "Sec. 530 relief." It currently allows employers to classify workers as independent contractors if they have historically done so, or if it is the industry practice. H.R. 3408 would repeal Sec. 530 and replace it with a new test which would be more difficult to meet.
Similarly, Senator Sherrod Brown, (D-OH) and Congresswoman Lynn Woolsey (D-CA)
have introduced legislation – the Employee Misclassification Prevention Act that would amend the Fair Labor Standards Act and require that employers keep accurate records of "non-employees" or "independent contractors" who work for payment. This act will penalize employers who attempt to incorrectly classify "employees" as "non-employees."
Tens of thousands of employers across the nation currently misclassify their workers as independent contractors, making employees ineligible for benefits like wage and hour rights, overtime, workers' compensation and unemployment insurance. Employees who are misclassified are also not protected by health and safety laws, or anti-discrimination laws.
These legislative initiatives would work to prevent workers from being incorrectly classified as independent contractors and would give them the lawful protection and employee benefits that they have legally earned. The Employee Misclassification Prevention Act would reportedly help ensure that employees have access to health and safety protections in the workplace, fair labor standards, and unemployment and workers' compensation benefits.
In this difficult economic time, it is truly unfortunate that misclassified workers are being taken advantage of by employers, and are being denied worker safeguards, such as losing lawful benefits that are rightfully earned. Additionally, because of the growing use of this tactic, law-abiding employers are continually being placed at an immediate disadvantage by competitors who cut corners and cheat workers by misclassifying employees.