The Social and Economic Costs of Employee Misclassification in Construction

With this study, a cross disciplinary team of the Center for Construction Policy Research has taken a first and significant step in documenting employee misclassification in the Massachusetts construction industry. This report documents the dimensions of misclassification and its implications for tax collection and worker compensation insurance. Misclassification occurs when employers treat workers who would otherwise be waged or salaried employees as independent contractors (self employed). Or as one report commissioned by the U.S. Department of Labor put it, misclassification occurs " when workers (who should be) getting W-2 forms for income tax filing instead receive 1099-Miscellaneous Income forms. " 1 Forces promoting employee misclassification include the desire to avoid the costs of payroll taxes and of mandated benefits. Chief among these factors is the desire to avoid payment of worker compensation insurance premiums. Employee misclassification creates severe challenges for workers, employers, and insurers as well as for policy enforcement. Misclassified workers lose access to unemployment insurance and to appropriate levels of worker compensation insurance. Also, they are liable for the full Social Security tax. They lose access to employer-based benefits as well. For employers, the practice of misclassification creates an uneven playing field. Employers who classify workers appropriately have higher costs and can get underbid by employers who engage in misclassification. The collection of Unemployment Insurance tax, and to some degree that of the income tax, are adversely affected by misclassification. Worker Compensation insurers experience a loss of premiums. Using several years of de-identified data on unemployment insurance tax audits made available by the Massachusetts Division of Unemployment Assistance (DUA), we have developed estimates of the dimensions of misclassification in the state and particularly in the construction industry. Because this study relies on Unemployment Insurance tax audits to develop estimates of the dimensions and impacts of misclassification, it addresses primarily the forms of misclassification that can be documented. It does not fully capture the scope of underground economy activities in construction and other sectors. • During the years 2001-03, at least one in seven, or 14%, of MA construction employers are estimated to have misclassified workers as independent contactors. This conservative estimate translates into a minimum of 2,634 construction employers statewide. 2 Across all industries 3 , 13% of employers were found to under-report worker wages and UI tax liability to the Commonwealth and thus to have misclassified workers. This represents about 26,000 employers statewide. This conservative estimate is …