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A new report on misclassification of workers has highlighted construction, both for the scale of the problem and for the magnitude of its impact on the sector.
Misclassifying employees as independent contractors carries significant financial consequences for workers as well as state and federal systems that rely on payroll-based contributions, according to the report by the Washington, D.C.-based Economic Policy Institute, a nonprofit think tank focused on economic justice.
While the problem spans multiple industries, construction stands out.
“Construction has the highest average annual earnings of the occupations we’re comparing, so that may explain why the dollar amounts ‘lost’ by misclassification are higher,” said Nina Mast, a policy analyst at the Economic Policy Institute and co-author of the report.
This distinction is important. Higher wages in construction mean that when workers are misclassified, the economic losses, whether in unpaid overtime, lack of benefits or lost employer contributions, are greater. So compared to lower wage industries, the stakes are simply higher.
Misclassification costs for contractors
The impact goes beyond workers. For non-residential contractors, misclassification can distort the competitive landscape.
“When employers illegally misclassify their workers, they can substantially reduce their labor costs, which gives these unscrupulous employers an unfair advantage over law-abiding businesses,” Mast said. “This behavior by unscrupulous companies puts pressure on law-abiding companies to break the law to reduce their labor costs, leading to a race to the bottom in labor standards, which is where the construction industry is.”
For contractors bidding on commercial and institutional projects, this “race to the bottom” can have real consequences.
According to Mast, companies that correctly classify workers, and thus pay payroll taxes, workers’ compensation premiums and benefits correctly, often find themselves competing with companies that artificially suppress costs. The result can be distorted bidding processes, where the lowest bid is not necessarily the most compliant or responsible.
The report also compares how construction compares to other industries. EPI estimates that misclassified construction workers lose roughly $20,000 a year in earnings and job benefits compared to what they would have earned as an employee. That’s much higher than workers in lower-wage industries like janitorial or retail, where losses are closer to $6,000 and $8,000, and on par with other high-impact industries like trucking.
Brian Turmail, vice president of association and industry image for The Associated General Contractors of America, emphasized that proper classification of workers is critical to maintaining fair competition in the industry.
Properly classifying workers requires accounting for payroll taxes, workers’ compensation, overtime and other compliance obligations — costs not borne by all companies, he said. At the same time, Turmail said independent contractors can play a legitimate role when used appropriately.
“When used and applied correctly, they can play an important role in construction, especially on short-term or highly specialized projects,” he said.
However, he added that the key challenge is to distinguish such arrangements from situations where workers are effectively tied to a single employer.
“That’s why we’ve advocated for clear and consistent rules that make it easier for contractors to make good faith decisions about classification,” Turmail said. “Contractors should also periodically review how workers are hired and managed on jobsites.”
More exposure for contractors
A misclassified worker who is injured can try to prove his misclassification to recover benefits. For contractors, this creates additional risk exposure.
Classification disputes can result in audits, fines, back wages and possible legal action. In an industry already facing labor shortages and tight margins, these liabilities can quickly become significant.
Mast pointed to possible solutions, some of which are particularly relevant to non-residential construction. One approach involves leveraging public procurement processes to enforce stricter labor standards.
“Project of labor contracts “They can increase bidding competition, reduce costs for taxpayers and ensure a skilled, high-quality workforce on construction projects,” Mast said. “These measures are intended to level the playing field by ensuring that all bidders meet the same labor standards, reducing the incentive to cut costs through misclassification.”
