Introduction and Background

Employers in an increasing number of industries misclassify their employees as independent contractors, denying them the protection of workplace laws, robbing unemployment insurance and workers’ compensation funds of billions of much-needed dollars, and reducing federal, state and local tax withholding and revenues, while saving as much as 30% of payroll and related taxes otherwise paid for “employees.” If undetected, employees miss out on fair pay, health and safety, workers comp, unemployment insurance, and the right to collectively bargain for better jobs. Misclassification also hurts law-abiding employers who play by the rules but are under-bid by their competitors.

Misclassification can take several forms. Employers call employees “independent contractors,” even when the workers are not running their own businesses; they require employees to form a limited liability corporation or franchise company-of-one as a condition of getting a job; and they pay workers off the books, without any payroll treatment at all. These workers are sometimes required to sign boilerplate contracts attesting to independent contractor status, even where the functional relationships do not reflect true independence. These practices are also called “payroll fraud” because they are intentional and aimed at evading the law. Legitimate business-to-business transactions are not payroll fraud, because true independent contractors have a specialized skill, set their own terms, and have invested in a business that enables them to earn a profit.

Employee misclassification is a persistent problem in many of our economy’s growth industries, including home care, janitorial, trucking, construction, hospitality and restaurants and, more recently, in the rapidly-growing app-based “on-demand” economy. State-level task forces, commissions, and research teams are using agency audits along with unemployment insurance and workers’ compensation data to document the scope of independent contractor misclassification. Confirming the findings of earlier national studies, these state reports show that 10 to 30% of employers, or even more, misclassify their employees as “independent contractors,” which indicates that several million workers nationally may be misclassified. State and federal governments lose billions in revenues annually.

You can download the full report below. 

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