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Cracking Down on Misclassification of Workers-- And Raising Tax Revenue

In a dramatic sweep of 117 employers, a new New York State joint task force of state labor, tax and worker compensation agencies found that 2,078 employees had been illegally misclassified as independent contractors, with $19 million in wages not reported to the state.  An additional 646 workers were owed minimum wage and overtime pay totaling $3 million. 

The worker abuse and tax losses for the state revealed by this raid are only the tip of the iceberg.  Last year a Cornell University report estimated that 704,000 of the seven million private-sector workers in New York state were misclassified as independent contractors, allowing employers to avoid withholding state and federal income taxes, unemployment insurance taxes and workers compensation payments. 

By targeting the problem of misclassification, states not only stop the abuse of workers rights, but raise revenue for state coffers.  The raid in New York uncovered $1 million owed to the state in unemployment insurance payments alone, which is just a tiny fraction of the $175 million in unemployment insurance taxes not paid to the state due to unlawful misclassification of workers.  On top of the unemployment insurance payments, the state will be getting back income and other taxes owed, along with additional civil penalties added to state revenue.

This New York raid by its new Joint Enforcement Task Force to address the problem of employee misclassification is just one example of recent moves by states to address the problem of misclassification. 

  • California was the first state to create a "Joint Enforcement Strike Force" to focus on misclassification of workers as "independent contractors."
  • Colorado last year enacted HB 07-1366  a law requiring construction sites to make sure all workers, whether officially employees or "independent contractors," are covered by workers' comp insurance.
  • Minnesota enacted MN Statute 181.723, which requires any independent contractor in the construction industry be certified as a legitimate Independent Contractor by the state.
  • Connecticut enacted Pub. Act. No. 07-89, which provides that employers who misrepresent the number or type of their employees for purposes of the workers' compensation system, can be issued a stop work order and ordered to pay a fine of up to $1,000. 

Dramatically stepping up enforcement of labor rights, particularly cracking down on misclassification of workers, has the potential to not only improve workers lives but raise billions of dollars in new revenue for cash-strapped states.

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