Agenda - Council Work Session - 07/28/2026

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HOME - FACTS - TABLES - VIDEOS - INFOGRAPHICS - AGENCIES - RESEARCH Ways to Combat Payroll Fraud and Wage Theft in Construction The U.S. public believes that the misclassification of workers as independent contractors is a significant problem (NELP, 2016). In a national survey of 1,000 registered voters, 84% said that misclassification is a serious problem. Another 78% of voters favor proposals that would make it harder for companies to misclassify workers as independent contractors and increase fines and penalties for misclassification, including 73% of Republicans. Combatting misclassification can be a popular political issue (Erlich, 2020). While worker misclassification can be addressed indirectly through Federal Labor Standards Act (FLSA) investigations, misclassification is not explicitly mentioned in federal labor laws (GAO, 2009). As a result, many states have enacted employee misclassification laws. Typically, state legislation increases the cost to employers that commit misclassification and wage theft by imposing fines or debarment. Research shows that this leads to a statistically significant decline in the practice, but only if paired with strong enforcement mechanisms (Galvin, 2016). There are underutilized tactics that state agencies can use to deter misclassification. Many enforcement agencies rely heavily on formal complaints, which can be ineffective because vulnerable workers are hesitant to file complaints out of fear of retaliation (Erlich & Gerstein, 2019; Weil & Pyles, 2006). Pairing complaint -driven investigations with targeted, randomized investigations of employers in industries that are prone to misclassification can increase the chances of exposing fraudulent contractors. Additionally, stop -work orders can halt all work on construction sites until contractors turn over payroll records and comply with investigators. Some agencies have reported that response times drop as low as one to two days with the use of stop -work orders (Erlich & Gerstein, 2019). Another tool to help disenfranchised workers recover lost wages is to record a wage lien against contractors who are under investigation. Wage liens operate similarly to mechanic's liens by not allowing employers to escape payment of wages by dissolving their businesses (Cho, Koonse, & Mischel, 2013; Gleeson, Taub, & Noss, 2014). Upstream liability laws hold general contractors liable for the nonpayment of wages and benefits, regardless of which subcontractor breaks the law (Ormiston et al., 2020). This form of multiemployer liability incentivizes self -policing in the industry by focusing efforts on upper -tier contractors that have authority to change practices through contractual agreements. California, Illinois, Maryland, New Jersey, New York, Nevada, and Virginia have enacted such policies targeted at primary contractors (Philips, 2021). Illinois' law applies only to general contractors who are not signatories to collective bargaining agreements on private projects that exceed $20,000 and excludes single family residential projects ( 2022). Wisconsin's Task Force on Payroll Fraud and Worker Misclassification recommended enacting an upstream liability law (DWD, 2021). Fully 71% of voters support holding general contractors legally responsible if their subcontractors fail to pay earned wages, unemployment insurance contributions, workers' compensation premiums, and Social Security taxes —including 67% of Republicans (NELP, 2016). Another legislative solution is to implement or strengthen prevailing wage laws (Hinkel, 2021). From 2010 through 2019, misclassification and off -the -books employment was 2% lower for construction workers in states with prevailing wage laws. That is because certified payroll records are typically used to survey local markets and ascertain prevailing wage rates for each craft, improving transparency and enforcement on public works projects. States with lower prevailing wage contract thresholds also had fewer construction workers who were misclassified or paid off -the -books because more projects were covered, making workers less vulnerable to illegal labor practices and taxpayers less vulnerable to fraud (Hinkel, 2021). 15