BCTD Slams Misclassification ‘Scam’

by Mike Hall, Apr 17, 2008

When union members from the AFL-CIO Building and Construction Trades Department’s (BCTD’s) National Legislative Conference hit Capitol Hill on Tuesday, one of the bills they urged their lawmakers to back had just been introduced that day.

The legislation (H.R. 5804) would put a halt to what the BCTD calls a “scam of unprecedented magnitude”—by eliminating the provision in the tax code that allows employers to escape paying employment taxes when they misclassify workers as independent contractors instead of employees. The problem is especially prevalent in the construction industry.

Says Rep. Jim McDermott (D-Wash.), one of the bill’s co-sponsors:

Dishonest and unscrupulous businesses are gaming the system and hurting decent, hard-working Americans and honest businesses in the process and it is time the cheaters either play fairly or face the consequences….Some businesses are trying to inflate their bottom line by depriving workers of what they have earned and that hurts us all.

When workers are misclassified as independent contractors, they pay higher taxes and face serious hurdles to qualify for workers’ compensation, unemployment benefits and many other benefits and protections that apply to employees.

Employers gain a big advantage. They can avoid paying Social Security, Medicare and unemployment payroll taxes, as well as workers’ compensation premiums—and they may be able to exclude the workers from health and pension benefits and avoid having to withhold income taxes. With far lower worker costs, crooked employers can undercut honest employees.

Some 10 million workers were classified as independent contractors in 2006, an increase of more than 2 million workers over the previous six years, and some 3.4 million of those were misclassified, according to the bill’s backers.

Employer misclassification is also a growing problem in high-tech, communications, trucking and delivery services, janitorial services, agriculture, home health care, child care and other industries.

Workers aren’t the only ones who suffer from the independent contractor scam. A report from the Department of Economics at the University of Missouri-Kansas City says misclassification in Illinois alone costs 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.

In September, Sen. Barack Obama (D-Ill.) introduced a bill (S. 2044) to close the tax loophole that allows employers to misclassify workers as independent contractors. Both bills also would strengthen the now-weak penalties employers face for misclassifying workers.

At the BCTD conference, both Democratic presidential candidates, Obama and Sen. Hillary Rodham Clinton (D-N.Y.), pledged to crack down on the independent contractor scam.

Click here for an issue brief from the BCTD on employee misclassification.

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