The Department of Labor along with the IRS and eleven states have announced a broad review of the hiring and pay practices of home builders and other companies government regulating bodies proclaim routinely misclassify workers as independent contractors rather than employees. States include Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington as well as New York, Hawaii, Illinois, and Montana.
On Monday 9/19, the federal agencies and top labor officials from the states agreed to coordinate enforcement efforts and share information about companies found to have violated labor laws, including denying workers minimum wages, overtime pay and benefits. The Labor Department recently sent requests to large home builders looking for pay and employment records.
The IRS is interested in the issue because employers don’t pay payroll taxes on workers classified as independent contractors. A Government Accountability Office report from 2009 estimated that the misclassification of workers cost the federal government $2.72 billion in 2006. As the Advi$or has recently noted, the misclassification issue has taken a higher profile in the past few years as cash-strapped states have focused on ways to capture more revenue and prevent employers from illegally failing to pay taxes on workers.
The proper classification between employee and independent contractor depends primarily on how much control or direction a business has over its workers. The more control– such as telling them where, when and what to work on as well as providing them with tools or equipment to work with– the more likely the worker is an employee. Employers aren’t required to withhold income taxes or pay Social Security or Medicare taxes for independent contractors. Nor do they bear the cost of the company match of Social Security or Medicare taxes. Meanwhile, independent contractors aren’t covered by many labor protections, including minimum wage and overtime laws, and unemployment or workers’ compensation insurance.
Regulators believe worker misclassification is particularly common in residential construction. Most large home builders in the U.S. typically don’t keep many laborers on their books and do little actual home construction. Instead, they entrust much of the construction to carpenters, plumbers, roofers, electricians and others employed by contractors. This reduces the companies’ costs and exposure to potential violations of labor laws.
There are many forces at work regarding this issue. There is the lost tax revenues. Organized labor sees abuse and would like more construction workers protected under unionization. Those businesses that operate according to the letter of the law note that it is difficult to compete with those that supposedly do not. And of course there are the companies who have been operating the way they operate for years who note that this kind of regulatory scrutiny only increases the cost of doing business and thus the cost of finished construction projects for all.
The Labor Department also noted that it was looking at other industries in addition to home building including hospitality, janitorial services, agriculture, day care, health care and restaurants. A Labor Department report in 2000 estimated that up to 30% of employers misclassify workers.