It’s a temptation that nearly every business owner faces: classifying an employee as an independent contractor. It’s easy enough to understand why. You aren’t responsible for paying their end of Social Security and Medicare. You don’t have to pay unemployment or worker’s comp claims. Overtime and minimum wage requirements can be skirted. Until recently, worker misclassification in construction has been a standard practice among many contractors, and not just the small companies.
Worker Misclassification in Construction Growing
Thanks in part to an extensive report from McClatchy DC, the reality of worker misclassification in construction has come out into the public eye. Employers know that it’s cheaper to pay an independent contractor (also known as a 1099 employee) than to hire a W-2 employee. They also know that when someone needs a job, it’s easier to pay them $17 an hour cash than $20 an hour reported. The result is that employers pay less in taxes and the employee pays more to remain legal, or none at all, and hope that it stays quiet.
The Cost of Worker Misclassification in Construction
According to that McClatchy report, worker misclassification costs the taxpayers billions of dollars each year. Is your business guilty? Are you classifying W-2 employees as 1099 independent contractors?
A lot of companies simply don’t know the laws. Others are well aware and choose to ignore them. Either way, there is an IRS website to help you determine how to classify someone working for you.
The big question is simply: Why should you care? If it’s been standard practice and everyone is doing it, then why change?
As I mentioned above, that extensive report into worker misclassification started a fire that doesn’t seem to be going out. A press release from the Rhode Island government website states that their AG plans to seek to increase penalties for worker misclassification. Employers could face felony charges instead of misdemeanor charges. That would:
“increase existing penalties to up to three years in prison and a fine of up to $10,000 for the first offense of misclassification or wage theft of $1,500-$5,000, or up to five years in prison and a fine of three times the wage amount or $20,000 (whichever is greater) for subsequent offenses of misclassification or wage theft in excess of $5,000.”
Weighing the Benefits vs the Risks
But the benefits seem to outweigh the risks. Some contractors won’t even bid on most government contracts. Many companies that follow the rules often find stiff competition from the plethora of contractors willing to live outside them and routinely win bids.
I found the breadth of worker misclassification in the construction industry to be stunningly widespread. Maybe I’m just a naive idealist. For the moment, it seems the status quo is only under a mild threat.
Keep These Key Things in Mind
Here are a few things to keep in mind and encourage you if you’re in the right. There is a large push to educate construction industry workers and get them to speak up if they may be misclassified as independent contractors.
The government seems to be taking this issue more seriously in the way they are prosecuting violators. I expect to see more regulation coming out of state capitols and even Washington, D.C. that helps to reign this in, if for no other reason than to get the tax dollars they’re missing out on.
The problem isn’t likely going to go away anytime soon. However, expect to see the government making examples out of the employers that they can prosecute. Many states are indeed starting to file felony charges for those that do get caught. My advice to you: Be proactive and make sure you’re classifying your employees correctly. It may cut into your profits to do so, but it’ll be worth it when the Department of Labor comes knocking.
