This week the House Select Revenue Measures and Income Security and Family Support subcommittee held a hearing as to whether employers misclassify employees as independent contractors - intentionally - in order to avoid taxes, insurance costs, and statutory protections for employees.
When workers are misclassified as independent contractors instead of employees, we all lose. Like $4.7 billion not paid in income taxes last year because of misclassifying employees as independent contractors.
In addition, the contingent workers lose. A GAO study - Contingent Workers - Incomes and Benefits Lag Behind Those of Rest of Workforce - found that most contingent workers suffer from very bad working conditions, poor or nonexistent benefits, and loss of legal rights.
Testimony on independent contractors on May 8, Employee Misclassification - Improved Outreach Could Help Ensure Proper Worker Classification described a case where workers lost money as a result of misclassification:
Employee misclassification alone is not a violation of FLSA, but may contribute to FSLA minimum wage and overtime pay violations or violations of tax, workers’ compensation, or unemployment insurance laws. DOL investigations have identified FLSA violations associated with employee misclassification.
For example, one misclassification case involved a valet parking company located in Arizona that provided services to local restaurants, sports venues, hotels, and theaters. In 2004, this company paid $66,947 in minimum wage and overtime pay back wages to 262 employees who had been misclassified as independent contractors.
When reviewing the employment relationship, the DOL investigator found that the services provided by these workers were integral to the business, and that the employer had imposed strict policies and procedures to follow, and told them when they would work, where they would work, what their pay rate would be, and what uniforms they would wear. The investigator determined that the workers were not required to use initiative, judgment, or foresight to be successful as independent contractors, did not have any investment in facilities or equipment, and were not operating to make a profit.
A recent study on misclassification of employees as independent contractors in the State of New York found that about 10% of employers misclassified employees and independent contractors, and in the construction industry that number rises to 14.9%.
The study found that workers, the public . . . and competitors of employers who misclassify employees are big losers.
Misclassified workers — as putative independent contractors — are directly and immediately burdened in several ways. They generally do not file for unemployment insurance benefits even though they may be eligible and do not receive appropriate levels of workers’ compensation insurance. If they are unemployed or injured on the job, the economic consequences can be devastating. They are solely responsible for withholding and reporting taxes at the substantially higher self-employed tax rate.
Their employers might provide them with the required IRS Form 1099-MISC showing gross wages paid [Schedule C — selfemployment] or simply pay cash “under the table” — without regard to tax laws, statutory wage standards and "below the radar screen” of state regulators.
Some may never benefit from Social Security. They are on their own for any health care or retirement savings. These workers may also be required, as a condition of employment, to purchase their own workers’ compensation and liability insurance coverage, and to sign waivers releasing employers from liability and other obligations inherent in a typical employer-employee relationship.
. . .
Employers have powerful economic incentives to limit or cut labor costs, particularly in those industries, such as construction, that are sharply competitive. The immediate advantages of misclassifying a worker are, for many employers, worth the more remote risk of being caught and penalized. To the extent that there is insufficient monitoring, oversight and regulation by policymakers and affected state and federal agencies, misclassification will continue to destabilize the business climate in certain industries.Misclassifying employers reap substantial savings and enjoy an unfair competitive advantage by not making those payments and incurring those costs required of a typical employer-employee relationship: the administrative costs for withholding taxes and making payments for Social Security, Medicare, unemployment insurance, providing the proper level of workers’ compensation insurance, paying overtime and minimum wages, and including workers in employee benefit programs.
Congressional Action
Congress wants to year from you. Here is the story:
In its last comprehensive estimate, the Internal Revenue Service (IRS) found that 15% of employers misclassified 3.4 million workers as independent contractors in 1984, resulting in $1.6 billion in lost Social Security, unemployment and income taxes (or $2.7 billion in inflation-adjusted dollars).
Studies suggest some employers misclassify workers as independent contractors in order to cut business costs. This gives these employers an unfair competitive advantage over employers who properly classify their workers as employees. These studies find that the problem of misclassification of workers has grown in recent years. For example, one study found that the percentage of all workers misclassified in Illinois grew from 5.5% to 8.5% (a 55% increase) between 2001 to 2005. Another report found the percentage of employers misclassifying workers in Massachusetts (according to the most conservative estimates) grew from 8% between 1995-1997 to 13% between 2001-2003.
In announcing the hearing, Chairman McDermott stated, “When workers are wrongly classified as independent contractors, they lose access to vital benefits, employers who play by the rules are unfairly disadvantaged, and State and Federal programs are starved of resources. We need a fair standard that is fairly enforced.”
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Employees who are misclassified as independent contractors also lose. Some employees think they want to be independent contractors because they think this gives them flexible hours. The reality is that flexible work schedules have nothing to do with whether one is an employee or an independent contract - at least in terms of how most of these relationships operate.
What is certain is that misclassified employees lose big.
The list of what they do not get is a long one. It includes:
not getting wokrplace benefits, such as retirement plan or health benefits
not accumulating credit for Social Security or Medicare coverage
not being eligible for unemployment insurance
not being covered by the FLSA for wages and hours
not having the right to organize or bargain collectively and thus losing the most important means to better their working conditions.
The House committee is asking for statements to be sent to them about these issues.
Statements are due by May 22 in either wordperfect or word formats. Instructions are at this link.
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