By Françoise Carré | June 8, 2015
Numerous state-level studies show that between 10 and 20 percent of employers misclassify at least one worker as an independent contractor. Independent contractor (IC) misclassification occurs when a worker who should be considered a direct employee of a business—and receive a W-2 form to file with tax returns—is treated as a self-employed, “independent” contractor, and receives a 1099-MISC (miscellaneous income) form instead. The overall numbers have likely increased in recent years as workers in such traditional industries as construction, trucking, and stagecraft have been joined by a growing cadre of “on-demand workers,” who often get their assignments via the Internet (Weber and Silverman 2015). Independent contractors working in the on-demand economy include technical workers, house cleaners, drivers, and scores of others—some of whom are misclassified employees. All independent contractors, in old or new industries, are ineligible for benefits such as the minimum wage, overtime pay, unemployment insurance, and workers’ compensation.
Misclassified workers can now be found in almost every sector of the economy, working for small companies to publicly traded multinational corporations. For example, Atlanta stagehands for concerts produced by Live Nation, a company listed on the New York Stock Exchange that has held shows for such artists as Maroon 5 and Billy Joel, have been misclassified as ICs by a staffing provider (Vail 2015; DePillis 2015). An estimated one-third of construction workers in Southern states such as North Carolina and Texas have been misclassified (Ordonez and Locke 2014a). And roughly 20,000 employees of CrowdFlower Inc., a San Francisco–based startup that breaks down digital jobs such as data entry, are misclassified, alleges a case now moving through the courts (Weber and Silverman 2015).
The costs to tax and social insurance systems and to workers add up. Businesses that misclassify fail to pay mandatory payroll taxes—Social Security and Medicare (FICA) and unemployment insurance (UI)—and workers’ compensation insurance. The independent contractor is made responsible for the full FICA tax (rather than half). The loss of billions of dollars in tax revenue creates a significant financial burden for local, state, and the federal governments, not only due to lost revenue but also because of the added cost of providing social services to uninsured workers. Businesses also are harmed by the practice of worker misclassification. Law-abiding firms that pay their taxes and properly classify their workers as employees face a competitive disadvantage and may feel pressured to cut corners with their workers’ employment status if they wish to remain competitive.
As a rule, companies found to be misclassifying workers and violating tax laws by the Internal Revenue Service usually do not get penalized by federal authorities due to legal constraints on the IRS. Not only are they not fined, they are often allowed to continue misclassifying workers under a tax loophole known as “Safe Harbor,” according to an investigative report by McClatchy (Ordonez and Locke 2014b). When companies are found in violation of state unemployment insurance laws, they are fined and assessed retroactive taxes. The issue, however, is that states have limited audit capacity. Improvements in coordination of state and federal efforts to uncover misclassification have begun in recent years to boost enforcement.
Beyond the dollars in play, there are millions of Americans wrongly left uninsured, without benefits and without job security.
This paper presents state and federal evidence on the magnitude and severity of IC misclassification and recent trends. It looks at related tax issues and other public policy considerations. In addition to more systematic research and existing and planned improvements to the enforcement of labor standards, mixed policy approaches are needed. The scale of the problem will require solutions that go beyond individual worker complaints or court cases, and that include a combination of prevention, information, inspection, and collective worker rights.
Following are some of the major findings of the report:
For the full paper, (In)dependent Contractor Misclassification, click HERE.
- Misclassification is most common in industries where it is most profitable (such as construction, where workers’ compensation insurance premiums are high), and in industries with scattered worksites where work is performed in isolation. Housecleaning, in-home care, and trucking are industries in which misclassification is particularly common. New “sharing economy” businesses create cause for concern about possible misclassification because it is unclear how “autonomous” these workers really are.
- Employers who misclassify avoid paying payroll taxes and workers’ compensation insurance, are not responsible for providing health insurance, and are able to bypass requirements of the Fair Labor Standards Act, as well as the 1986 Immigration Reform and Control Act.
- Misclassified workers are ineligible for unemployment insurance, workers’ compensation, minimum wage, and overtime, and are forced to pay the full FICA tax and purchase their own health insurance.
- Misclassification undermines worker bargaining power and leaves workers more vulnerable to wage theft.
- When workers are misclassified, federal and state governments lose out on revenue from income taxes. Federal and state unemployment insurance, worker compensation, and disability insurance systems are adversely affected.
- Employers who play by the rules are disadvantaged by higher labor and administration costs relative to employers who misclassify.
- There are a number of policies to address misclassification, including stepped-up enforcement, higher fines, information campaigns, and stronger collective bargaining.
About the author
Françoise Carré is research director at the Center for Social Policy in the University of Massachusetts at Boston’s McCormack Graduate School of Policy and Global Studies. She has written extensively about temporary and short-term work in the United States and cross-nationally and about low-wage employment, particularly in retail trade. She also contributes research to the global research and action network WIEGO, which focuses on informal employment. Carré’s most recent book, coedited with Chris Warhurst, Patricia Findlay, and Chris Tilly, is Are Bad Jobs Inevitable? (Palgrave, 2012). She has coauthored articles in the journals Work, Employment, and Society and The British Journal of Industrial and Labor Relations, among others, and authored numerous book chapters. She currently is preparing a book manuscript titled “Retail Work Round the Globe,” coauthored with Chris Tilly. Carré holds a Ph.D. in urban and regional studies from the Massachusetts Institute of Technology. She can be reached at Francoise.Carre@umb.edu.
Economic Policy Institute
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