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<br />a . . ONE -PAGE FACTS o • •
<br />What Is Worker Misclassification, Payroll Fraud, and Wage Theft?
<br />Payroll fraud is rampant in the U.S. construction industry. Employers misclassifying their workers as
<br />"independent contractors" and paying workers entirely "off -the -books" in cash -only arrangements are
<br />two of the primary ways in which payroll fraud occurs. In construction, employers —either knowingly or
<br />unknowingly —engage in this illicit activity to reduce total costs and bid prices (Ormiston, Belman, & Erlich,
<br />2020). By classifying workers as independent contractors rather than as employees, businesses artificially
<br />reduce their labor costs by avoiding the payment of fringe benefits and by shifting their share of the tax
<br />burden onto workers. Employers who misclassify their workers do not pay their share of unemployment
<br />insurance, do not withhold income taxes for employees, and do not contribute to state workers'
<br />compensation systems. Misclassification also enables other forms of wage theft, such as minimum wage
<br />violations and overtime violations, as independent contractors are not protected by federal statutes such
<br />as the Fair Labor Standards Act (Erlich, 2020; Erlich & Gerstein, 2019; Cooper & Kroeger, 2017). Between
<br />10% and 20% of employers misclassify at least one worker as an independent contractor (Carre, 2015).
<br />Certain industries, like construction, are more prone to misclassification than others. In the past two
<br />decades, there have been at least 21 studies by academic professors, policy experts, and government
<br />agencies that have estimated the incidence of construction worker misclassification within the United
<br />States. These 21 studies cover 17 different U.S. states, six cities in the American South, and the United
<br />States as a whole. Although they each differ in methodology, the findings are clear and consistent:
<br />construction businesses are misclassifying blue-collar trades workers at alarmingly high rates.
<br />A landmark national study released in 2020 estimated that between 12% and 21% of all construction
<br />workers are misclassified as independent contractors or paid "off -the -books" in cash (Ormiston, Belman,
<br />& Erlich, 2020). In Missouri, 21% of construction workers are misclassified or are working "off -the -books"
<br />in cash -only arrangements (Kelsay, 2023). In New York, 18% of all independent contractors who were
<br />identified as "low -paid" were working in construction (Moe, Parrot, & Rochford, 2020). In Massachusetts,
<br />17% of audited construction companies were actively misclassifying employees (Juravich, Ormiston, &
<br />Belman, 2021). In Rhode Island, 12% of construction employers misclassify workers (Ormiston & Juravich,
<br />2022). In Kentucky, 26% of audited construction companies were actively misclassifying employees; an
<br />identical percentage was found in Michigan (Kelsay & Sturgeon, 2011; Belman & Block, 2009). In Indiana,
<br />more than 47% of audited construction companies were actively misclassifying employees (Kelsay &
<br />Sturgeon, 2010). While some independent contractors are classified legitimately and by their own choice,
<br />the disproportionate representation of misclassified independent contractors in construction suggests a
<br />pervasive problem in the industry that contributes to economic inequality.
<br />Fraudulent contractors who engage in employee misclassification underbid law-abiding, responsible
<br />competitors who properly classify their employees. This is especially true in low -bid models of
<br />construction, such as in lettings for public works projects. One study found that misclassification allowed
<br />unscrupulous employers to be awarded federal projects during the 2009 economic stimulus program after
<br />the Great Recession (Locke & Ordonez, 2015). This places compliant construction firms at a disadvantage
<br />and puts them in a situation where they would either lose market share or be forced to engage in similar
<br />illicit employment practices in order to match their competitors' bids. The result is an erosion of job quality
<br />for skilled trades workers, poorer infrastructure quality for communities, and less tax revenue and lower
<br />levels of funding for social insurance programs for state governments.
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