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Up to 2.1 million US construction workers books were misclassified or paid for by 2021, according to a new report from the Century Foundation, a progressive think tank and research group focused on equity in education, health and work.
A Change to the regulations of the Department of Laborstarting March 11, it will reverse a Trump-era change and implement a new test to determine whether a worker is an employee or an independent contractor.
Laura Valle-Gutierrez, a fellow at the New York City-based Century Foundation and one of the report’s authors, said she was excited to see the DOL’s rule change, which could help with the problem of the misclassification, although more could still be done, she said.
“Additional changes, such as investment in enforcement and the expansion of joint and several liability, are some of the changes that are needed to really curb the problem,” said Valle-Gutiérrez.
Here, Valle-Gutierrez talks to Construction Dive about her research and why misclassification isn’t just a problem for workers, but also for contractors looking to win work.
The following has been edited for brevity and clarity.
Immersion in CONSTRUCTION: What is the main result of your research?
Laura Valle-Gutiérrez
Permission granted by Century Foundation
Laura Valle-Gutiérrez: The concept of worker misclassification is nothing new. I think there have been decades of reports, and anecdotally, I think a lot of people know of people being paid for their books or treated as independent contractors when they really shouldn’t be. So we went into this research wanting to really understand the scope, because one of the challenges of any underground economy is to know the scope. By nature, it will not appear in the data. Trying to hide.
We wanted to know how many workers were being misclassified, mislabeled, paying off the books, denied their rights, but also what are the costs of this? Because I think the reason this matters beyond workers’ rights is the broader harm to people and businesses.
As many as 2.1 million construction workers are estimated to be misclassified or off the books, which is nearly 20% of the construction workforce. I think the scale is quite amazing.
How does worker misclassification affect compliant contractors?
It is certainly an important question. I think in construction, like many other industries, labor costs are a really big budget item. It’s a huge cost to employers and obviously that’s the reason they misclassify workers or pay them off the books because it’s a cost saving mechanism for them. But it’s also a fraud.
One of the reasons why it is too harmful to other employers that they don’t, a law-abiding employer will be less competitive than someone who can cut his costs because he’s paying his workers off the books. They don’t pay workers’ compensation or overtime or unemployment insurance taxes; none of these other things that law abiding employers are paying for. So it also just undermines the ability to have a competitive market and a level playing field.
Beyond the DOL rule change, what other policies need to be reformed?
There are a few different things. This is both a state and federal issue. Many states, such as California and New Jersey, have passed “ABC” tests that make it very easy to identify who should be an employee and who should not be. And I think under any ABC test, we know that construction workers who are currently misclassified would count as employees.
So I think this is an effort that’s happening at the state level that could theoretically happen at the federal level, although in practice we’re unlikely to see anything like that anytime soon.
States are also working to expand the pool of people liable for misclassification by expanding things like joint responsibility of the employerso this means that not only is the subcontractor misclassified as the worker, but so is the main contractor.
And then, obviously, enforcement is only as effective as funding those offices. Therefore, it is important to fully fund different agencies that are responsible for enforcing these issues.
Joint liability is not the most popular policy. Do you think it would benefit both workers and companies?
Yes, definitely. Obviously, from a worker’s point of view, it’s going to make sure that workers have more protections, right? Because part of the problem is that it’s very difficult to find out who the person is that hired that person and is therefore responsible for the misclassification, the fraud.
I can understand why a general contractor might be wary of this. But at the same time, as I said, curbing misclassification will level the playing field. This is just such a common practice that it’s hard not to participate. That’s why it requires some of these policy changes, perhaps broader, to address some of the problems that have become entrenched in the industry.
What else do you want people to know about this topic?
We’ve talked about cost, but I think it’s worth noting that misclassification costs workers directly in terms of losing access to overtime pay or unemployment insurance.
But there are also these broader social costs: costs to state governments, to our Social Security trust funds and our unemployment insurance trust funds that employers don’t have to pay when they misclassify workers. So those are broader costs to taxpayers that we talk about in our report, which I think are very important to understand.
