Construction Law: Avoiding Misclassification
The Impact of Worker Misclassification in the Construction Industry
by Trent Cotney, partner, Adams & Reese, LLP
(Editor’s Note: Trent Cotney, partner at Adams & Reese, LLP, is dedicated to representing the roofing and construction industries. Cotney is General Counsel for the Western States Roofing Contractors Association and several other industry associations. For more information, contact the author at (866) 303-5868 or go to www.adamsandreese.com.)
With the recent change in the independent contractor rule going into effect in March 2024, it is important to understand the reasons behind misclassification claims. In this article, we will look at the economic impact of the use of sub labor and how employers can address the challenges.
One of the most concerning, wide-ranging consequences of worker misclassification is the loss of tax revenue. Employers who categorize their workers as independent contractors are not required to deduct taxes and Social Security contributions from their paychecks. Therefore, misclassification leads to income underreporting on tax filings, resulting in significant losses in tax revenue at both state and federal levels. For instance, due to underreporting in the construction industry, it is estimated that in 2021 Social Security and Medicare lost between $3.3 billion and $6.6 billion. Similarly, that same year, federal and state income taxes suffered losses between $1.3 billion and $2.5 billion. According to some sources, those figures may be underestimated.
Underreporting also affects the solvency of state unemployment insurance programs and workers’ compensation trust funds. When workers are misclassified, they may not receive the benefits they are entitled to in the event of job loss or workplace injury. This practice places additional strain on public assistance programs, as misclassified workers may turn to them for medical costs and financial support. For example, according to a 2021 report, in Massachusetts, nearly half of the approved trust fund cases were paid out to injured construction workers, highlighting the disproportionate reliance of construction workers on these programs.
When misclassified workers are injured and lack medical or workers’ compensation insurance, they are more likely to require public services for health care and financial assistance. According to a 2022 study, when compared to all workers, construction workers are three times more likely not to have health insurance. In addition, their families are more likely to be reliant on public programs. The study concluded that 39 percent of construction worker families are reliant on at least one public safety net program. That enrollment has a $28-million-per-year price tag for taxpayers.
Worker misclassification is dangerous for workers, but it also places law-abiding contractors at a competitive disadvantage. Contractors who engage in misclassification can submit lower bids on construction projects, which undercuts fair-minded contractors. This situation creates a dilemma for honest employers. They can either follow their competitors’ misclassification actions to reduce labor costs or risk going out of business. As a result, misclassification distorts competition in the construction industry, favoring those who misclassify workers over those who comply with labor laws and fair employment practices.
Regulating worker classification has been challenging over the years, as the requirements tend to vary based on which political party is in control. In agreement with the Fair Labor Standards Act, the United States Department of Labor (DOL) has enacted rules to help employers determine worker classification. In addition, the proposed Protecting the Right to Organize Act is intended to ensure workers’ rights to collective bargaining and union organization. However, as these and other proposals become laws, they can prove difficult for employers to understand and follow, and often, the financial burden of classifying workers as employees is impossible for contractors to manage.
Enforcement of worker classification rules is also challenging. Generally, the DOL and the Internal Revenue Service lack the funding to investigate misclassification practices and enforce the regulations. However, the threat of enforcement and subsequent penalties is always present. In addition, misclassified workers have traditionally been hesitant to file complaints, especially if they are undocumented immigrants. To address that fear, the United States Department of Homeland Security announced last year a process through which workers participating in DOL investigations could have enforcement actions on their immigration status deferred. That process, along with other whistleblower protections, could provide misclassified workers with more power to protest.
Sub labor dominates the roofing industry and is here to stay for the foreseeable future. Determining how to classify your workers can seem like a daunting task. Some of the guidelines fall into a gray area that can be hard to navigate. In addition, as we all know, classifying workers as employees can be beneficial for them but can be a substantial financial commitment for you.
