Crackdown on misclassified ‘independent contractors’

Bill Knight column for Thurs., Fri., or Sat., Aug. 6, 7 or 8

If your company says you’re an “independent contractor” or temp, it may be misclassifying you, and it could be less of an error or impulse than a strategy.

It also could be illegal, according to the government.

Employers that knowingly misclassify workers as “independent contractors” commit fraud, cost taxpayers billions of dollars, and contribute to a decline in labor standards, according to the Economic Policy Institute (EPI).

In a report written by Francoise Carre, EPI exposes a troubling trend touching many industries, from construction to food processing, It’s a practice that’s a growing issue in Illinois in spite of the Employee Classification Act, a law passed in 2008 to curtail the scheme. The statute says workers are considered employees unless they pass several tests, including being free from control or direction by their companies.

Nevertheless, employers here and nationwide continue to misclassify workers or artificially arrange work to be performed by so-called third parties, dubbed “subcontractors,” “temporaries” or “contingent” staff even though they use employer equipment, follow management instructions and are, really, employees.

Employers with independent contractors don’t have to pay those workers’ payroll taxes, companies’ half of Social Security and Medicare taxes (FICA), state and federal unemployment taxes, workers’ compensation insurance premiums, or disability insurance, or complying with either the Fair Labor Standards Act or the Immigration Reform and Control Act, meaning companies may not be subject to paying minimum wage or overtime, or could hire undocumented workers without verifying their immigration status.

It’s difficult to know the exact number of misclassified workers, but some research indicates that 10 to 20 percent of employers misclassify at least one worker as an independent contractor, EPI says. Studies also show the ruse has increased over the last 20 years.

Adam Kader, director of Arise Chicago Worker Center, said that in the last two years that group has noticed more service workers paid as independent contractors. Elsewhere, warehouse workers and truckers who perform all of their work for one trucking firm or major retailer say they’re misclassified. Other disputes involve Uber and Lyft drivers; some Nissan autoworkers in Mississippi and Tennessee earn half as much as full-time employees because they’re categorized as temporary; and the National Labor Relations Board last year ruled that FedEx Home Delivery drivers in Connecticut may be called independent contractors, but they’re actually employees and therefore eligible to vote to unionize.

On the West Coast, misclassification of truck drivers by Pacific 9 Transportation last month sparked a strike at the Los Angeles-Long Beach port, where drivers demanded recognition as employees. That would give them the right to unionize.

“I’m tired of misclassification and abuse,” said Fariborz Rostamian, a misclassified Pac 9 driver for 10 years. “I won’t keep paying for that truck because it’s too dangerous.”

Also last month, the Labor Department reminded businesses and workers how to determine whether workers are employees or independent contractors. Its 15-page document notes that federal law defines most workers as employees because it defines “employ” as “to suffer or permit to work.” The department says employers should use the “economic realities test,” which focuses on whether a worker is economically dependent on the employer.

“The practice can constitute fraud; it violates tax and employment laws,” EPI’s Carre writes. “Misclassification results from either ignorance or criminal misconduct.”

Besides exploiting workers, the practice hurts local, state and federal treasuries in lost revenues and higher costs for social services to workers made eligible by employers that won’t provide insurance or other benefits. The loss of such tax revenue can be huge. Carre shows misclassification in the construction industry in the South annually costs Florida $400 million, North Carolina $467 million, and Texas $1.2 billion.

A 1984 IRS study found 15 percent of employers misclassified 3.4 million workers, resulting in an estimated loss of $1.6 billion in FICA taxes alone. Adjusted for inflation for the year 2014, the loss in FICA taxes last year would be $3.5 billion.

Further, misclassification lets employers unfairly compete against companies that don’t violate the law.

Chicago attorney Alejandro Caffarelli – who represents 41-year-old truck driver Lucio Barrera in a misclassification lawsuit against DNJ Intermodal Services – told the Chicago Tribune that the scheme lets companies shift the cost of doing business onto workers.

“The employer reaps all the rewards,” Caffarelli said.

[PICTURED: Editorial cartoon by Keith Tucker/What Now Cartoons.]