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News from EPI Independent Contractor Misclassification is a Large and Growing Problem

In (In)dependent Contractor Misclassification, Françoise Carré, Research Director for the Center for Social Policy at the University of Massachusetts, Boston, conducts a thorough analysis of trends in independent contractor misclassification throughout the labor market. Misclassification, which occurs when a worker who should be considered a direct employee of a business is treated as a self-employed contractor, constitutes a business model for unscrupulous employers who use it to avoid employment-related obligations and save on labor and administrative costs.

“Misclassification is one way in which employers deprive workers of the ability to bargain over wages and working conditions,” said Carré. “It is a troubling and understudied trend and seems to be on the rise. The growth of the ‘sharing economy,’ which mostly treats on-demand workers as self-employed, further highlights the need for clarity on employee status.”

Employers who misclassify avoid paying payroll taxes and workers’ compensation insurance, and are not responsible for providing health insurance and other workplace benefits. They are able to bypass requirements of the Fair Labor Standards Act, as well as the 1986 Immigration Reform and Control Act, which forbids employers to knowingly hire undocumented immigrants. Workers, meanwhile, are ineligible for workers’ comp, overtime, and unemployment insurance—unless they successfully challenge their status with their state unemployment insurance agencies. They must pay the full FICA tax and purchase their own health insurance. Misclassification undermines worker bargaining power and leaves workers more vulnerable to wage theft.

Federal and state unemployment insurance, worker compensation, and disability insurance systems are adversely affected, and federal and state governments lose out on revenue from income taxes. Meanwhile, employers who play by the rules are disadvantaged by higher labor and administration costs relative to employers who misclassify.

Misclassification is not easily documented, but numerous state-level studies indicate that 10 to 20 percent of employers misclassify at least one worker. It is most common in industries where it is most profitable (such as construction, where workers’ compensation insurance premiums are high), and in industries with scattered worksites where work is performed in isolation.

Misclassified workers can be found throughout the economy, working for small companies to publicly traded multinational corporations. For example, many Atlanta stagehands have likely been misclassified as independent contractors. Meanwhile, despite maintaining strict control over their drivers’ working conditions, FedEx classifies many of its drivers as independent contractors.

Carré highlights construction, trucking, housecleaning, in-home care, stagecraft, and some new “sharing economy” companies as industries where misclassification is particularly common. She suggests a number of policies to address misclassification, including stepped-up enforcement, higher fines, information campaigns, and stronger collective bargaining.

This paper is part of EPI’s Raising America’s Pay project, a multiyear research and public education initiative to make wage growth an urgent national policy priority. Raising America’s Pay seeks to explain wage and benefit patterns—and the role of labor market policies and practices in suppressing pay—and identify policies that will generate broad-based wage growth.