Bill Would End Employers’ Worker Misclassification ‘Scam’

by Mike Hall, Sep 14, 2007

Millions of U.S. workers may be misclassified by their employers—often deliberately—as self-employed, independent contractors instead of employees. New legislation introduced in the U.S. Senate this week by Sen. Barack Obama (D-Ill.) would put a stop to the practice, which the AFL-CIO Building and Construction Trades Department (BCTD) calls a “scam of unprecedented magnitude.”

For the workers, misclassification means they are paying higher taxes and may face serious hurdles to qualify for workers’ compensation, unemployment benefits and many other benefits and protections that apply to employees.

For the employers, misclassifying workers as independent contractors can mean significant advantages over law-abiding competitors. Employers can avoid paying Social Security, Medicare and unemployment payroll taxes, as well as compensation premiums—and they may be able to exclude the workers from health and pension benefits and avoid having to withhold income taxes.

The bill, the Independent Contractor Proper Classification Act of 2007, would close the tax loophole that allows unscrupulous employers to deliberately misclassify workers and would give the government new enforcement powers against such employers. Presidential candidate Obama says:

Every day, millions of Americans go to work and play by the rules, teaching our children the values of hard work and responsibility, and most employers treat their workers fairly, paying them a decent wage and providing the benefits they deserve. But we must fix the system to stop those few employers from breaking the rules and exploiting this tax loophole at the expense of taxpayers and our workers’ safety and security.

In a letter to the Senate supporting the bill, AFL-CIO Legislative Director Bill Samuel writes that 10 million workers were classified as independent contractors in 2006, an increase of more than 2 million workers over the previous six years.

Other studies have found that as many as 30 percent of the employers misclassify their workers as independent contractors, with higher misclassification rates in particular states and particular industries. Misclassification is especially common in the construction industry and is a growing problem in high-tech, communications, trucking and delivery services, janitorial services, agriculture, home health care, child care and other industries.

The misclassification problem was a major issue tackled earlier this year at the BCTD legislative conference and presidential forum. Conference delegates took to Capitol Hill for a rally and lobbying visits, seeking support to close the independent contractor loophole, among other issues. The BCTD calls misclassification: 

a scam of unprecedented magnitude…a thinly veiled, and illegal, attempt to boost profits, deny workers health, retirement, workers’ compensation, and unemployment benefits, and deprive state and federal governments of hundreds of millions of dollars in tax revenues.

A report from the University of Missouri-Kansas City Department of Economics says misclassification in Illinois alone cost the state $124.7 million in lost income taxes from 2001 to 2005, $95.9 million a year in workers’ compensation premiums and $39.2 million annually in unemployment insurance taxes.

Says Sen. Dick Durbin (D-Ill.), one of the bill’s co-sponsors:

When you walk down the streets of Chicago, and in the suburbs and towns throughout Illinois, you can see construction workers hard at work building new homes, office buildings and roads. These workers deserve their fair share from employers who are not trying to cheat the system.

At the state level, last month Illinois Gov. Rod Blagojevich (D) signed a law to crack down on employers that misclassify their workers. Last week, New York Gov. Eliot Spitzer (D-N.Y.) signed an executive order to create a multi-agency task force to strengthen enforcement of labor laws against employers scamming the system.

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