Agenda - Council Work Session - 08/10/2026

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Misclassification. Payroll Fraud. & Wage Theft: A Primer for Local Government Officials Misclassification, Payroll Fraud, and Wage Theft are three interrelated issues that have unfortunately become pervasive throughout the construction industry. While not unique to construction, these issues are particularly acute because about a quarter of annual industry spending comes from public sources (Le., taxpayers). In other words, without proper regulatory safeguards, public spending on infrastructure can unintentionally subsidize these fraudulent and exploitative business practices. Misclassification is the act of redefining an employee as an independent contractor. A misclassified worker is deprived of many protections that are attached through the employee -employer relationship, including minimum wage, unemployment insurance, health insurance, overtime, and worker's compensation. Employers who misclassify workers shift all of the liability for paying payroll taxes (Social Security, Medicare/Medicaid, etc.) and other legal obligations onto the individual workers. This allows employers to "save" up to 20-30% of their labor costs. Payroll Fraud occurs when employers do not fulfill their obligations to pay taxes and fund social safety net programs via payroll taxes and normal business overhead (such as carrying workers' compensation insurance). It occurs when workers are misclassified, but can also occur in situations where workers are being paid in cash or otherwise "off the books," (because payments to those workers are not easily traceable by regulatory and tax authorities), and when workers experience wage theft (because it reduces taxable wages and income). Wage Theft occurs when workers are not paid in full (or at all) for the work they perform, and this can take a multitude of different forms: not paying for all hours worked, not paying the stated wage, not paying overtime, requiring workers to perform tasks "off the clock" (such as cleaning), demanding "kickbacks" from workers, etc. Since 2019, Minnesota has treated wage theft as a felony crime, but prosecutions have remained relatively few and far between. Taken together, these violations have systemic effects of depriving workers of the ability to earn a fair and steady income from their labor, depriving lawful contractors of a fair competitive business environment, depriving project owners and developers of a healthy industry and workforce to build their projects, and depriving taxpayers and communities of a properly -funded social safety net. Victims of wage theft and other fraudulent business practices face housing instability, food insecurity, and increased dependence on public assistance programs, compounding the burden on taxpayers, lawful employers, and communities.