Misclassification of Employees as Independent Contractors
Some contractors in the construction industry are deliberately misclassifying workers as independent contractors rather than employees to avoid payroll taxes, insurance premiums and other employment expenses in order to boost company profits. This practice grossly undercuts honest, law abiding contractors and, in addition, deprives the federal, state, and local governments of millions of dollars in revenue.
Key Points
- Contractors who misclassify employees as independent contractors reduce labor costs by between 15-30%. This places honest contractors at a competitive disadvantage in an industry with only 20% gross margins.
- By skirting around workers’ compensation premiums, honest firms are forced to compensate for shortfalls in these programs. These employers deny their workers the opportunity to obtain benefits regularly available to employees such as unemployment insurance and workers’ compensation insurance. This potentially causes a strain on the health care system and the workers compensation funds, which in turn leads to a rise in workers compensation premiums for firms paying into the system. In addition, this problem contributes to the current public health crisis and Medicaid crunch.
- The U.S. Department of Labor states that the number-one factor for employers misclassifying workers is the desire to avoid paying workers comp premiums and to otherwise avoid workplace injury and disability disputes. Employers of independent contractors avoid payments to state workers compensation funds, unemployment insurance and Medicare.
- Workers are deprived of essential worker protections under federal and state labor and employment laws. Independent Contractors enjoy NONE of the same protections or benefits of an employee. These individuals assume all liability for potential injuries obtained on the job site. In addition, it is incumbent on these workers to pay taxes, which in most cases does not happen.
- There are legitimate Independent Contractors in the Construction Industry. It is important that measures taken to address the current problem of misclassification do not undermine legitimate, law abiding small businesses and sole proprietorships that currently operate in the industry.
Position
While we have seen certain enforcement efforts in certain regions by state agencies and the Internal Revenue Service, the Department of Labor (DOL) needs jurisdiction and enforcement capabilities to go after these bad actors. Congress should pass legislation allowing the Department of Labor to levy massive fines and penalties to once and for all curb the practice of misclassification of employees. Furthermore, the current tax gap has reached epic proportions; addressing misclassification will help to address billions in lost revenue to the federal government. The Masonry Industry urges Members of Congress to support legislation which addresses this problem.
