Misclassification of Workers
The misclassification of workers as “independent contractors” is a nationwide problem affecting millions and is especially widespread in the construction industry. As then IU President John Flynn testified at a House Subcommittee hearing on this issue in 2007, “When an employer … treats a worker as an independent contractor rather than an employee — despite the fact that the employer controls and directs how the worker performs his or her work, and exercises financial control over the economic aspects of the worker’s job… the employer is misclassifying the worker.”
Disreputable contractors routinely misclassify workers to avoid paying payroll and Social Security taxes, workers’ compensation, unemployment insurance, Medicare, health and welfare and pension contributions, as well as prevailing wage on public construction jobs, which puts law-abiding employers at a competitive disadvantage. Paying workers in cash or “off the books” also deprives countless workers of their legal rights and cheats federal and state governments out of significant revenues.
Studies estimate that between 10% and 30% of all employers misclassify their workers as independent contractors with devastating effects for the workers, reputable businesses, and the:
- Misclassified workers lose important workplace protections including minimum wage and overtime, access to unemployment insurance and workers’ compensation, employer contributions to Social Security and Medicare, and coverage by civil rights and health and safety laws.
- Responsible employers who obey the law and pay their taxes can be underbid by competitors who misclassify their employees and thus lower their payroll costs by as much as 30 percent.
- The federal treasury loses approximately $2.7 billion a year in unpaid taxes due to misclassification. States also lose millions in revenues each year in unpaid taxes and unemployment insurance contributions.
The IU and BAC Locals/ADCs have worked hard to secure the enactment of stricter laws in several states (see Journal article, Illinois Members Help Lawmakers Stop Crooked Contractors). BAC and the AFL-CIO Building Trades affiliates, however, continue to lobby Congress for national legislation to level the playing field for America’s businesses, ensure workers are afforded the protections they are legally entitled to, and correct a serious tax loophole that allows some cheaters to evade the law.
BAC and the AFL-CIO Building Trades strongly support this legislation:
The Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (TRAC) H.R. 3408 (House) / S.2882 (Senate)
The TRAC Act tackles worker misclassification by closing a tax loophole in the IRS code and increasing penalties on employers who misclassify their employees and who have failed to comply with reporting requirements.
The Employee Misclassification Prevention Act (EMPA)
H.R. 5107 (House) / S.3254 (Senate)
This bill makes employee misclassification a violation of the Fair Labor Standards Act and would reduce this practice by:
- ensuring that employers keep records that reflect the accurate status of each worker;
- Increasing penalties on employers who misclassify their employees and are found to have violated employees' overtime or minimum wage rights;
- Requiring employers to notify workers of their classification; and
- Providing protections to workers who are discriminated against because they have sought to be accurately classified.
EMPA would improve federal and state efforts to detect and stop misclassification by:
- Mandating that states conduct audits to identify employers who misclassify workers and that the Department of Labor (DOL) monitor states' efforts to identify misclassification;
- Directing states to strengthen their penalties for worker misclassification;
- Permitting the DOL and IRS to refer incidents of misclassification to one another; and
- Directing the DOL to perform targeted audits focusing on employers in industries that frequently misclassify employees.
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