Roosevelt Institute | Cornell University

Worker Rights: A Lens for Economic Policymaking

By Kelly McClurePublished October 24, 2014

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The misclassification of Day Laborers as Independent Contractors generates a climate of exploitation. Not only are workers deprived of legal rights such as worker's compensation, but employers who misclassify workers are able to exploit the market. By paying lower wages (wage theft) these companies create unfair market conditions in which they evade paying taxes, avoid liability for worker injuries and often expose workers to hazardous working conditions with few repercussions.
By Kelly McClure, 10/24/14

Misclassification occurs when an employer incorrectly registers an employee as an independent contractor. In some instances these errors occur when employers lack the training to properly use classification codes and navigate the laws that govern it. This situation is particularly true for cases involving day laborers given the nature of the work they perform. However, other employers intentionally misclassify these workers to cut their labor costs and gain an unfair advantage in the market. According to The Cost of Worker Misclassification in New York by Linda Donahue, James Lamare, and Fred Kotler, several audits have estimated that, on average, over 39,000 New York public sector employers misclassify workers as independent contractors each year. The New York public sector construction industry alone made up nearly 15%, on average, a year in misclassified workers. These numbers are reflected in the private sector as well, where over 45,000 employees are misclassified; which mirrors the percentage of state employees.

This ultimately leads to severe consequences for both workers and employers. First, it robs many misclassified workers of the protections they are entitled to under U.S. Labor codes. Worker's Compensation, minimum wages, and safe working conditions are often a rare luxury for this class of workers. The circumvention of labor laws creates an atmosphere in which employers openly ignore labor standards and gain an unfair advantage over other employers. Moreover, by listing these employees as ‘independent contractors' many burdensome regulations and financial hardships are shifted onto them; while employers are  relieved of such duties and gain desirable tax advantages for simply marking a different box.

While these businesses are clearly concerned with profit-maximization they too face high risks. This misclassification may provide them with short-term gains, but in the long-run they can contribute to market destabilization and financially damage law-abiding companies. Lawful firms will bear the costs of unlawful competition through higher tax and insurance payments. Those who cheat the system should not be able to reap such large financial benefits and cause significant damage to their employees in the process.

Along with the issues that both employees and employers face are those that the government also faces. This arises in the form of a drain on safety net resources, such as unemployment insurance, that could be better spent elsewhere if workers were simply classified properly. Estimates in California put the total tax loss at nearly $7 billion for the state, deeply impacting its state resources and not an unlikely phenomena that can occur in New York. Even with New York's economy slowly improving, misclassification poses a critical challenge for the state to address in getting under control loss revenue and to ensure that corporations are acting within the law.

There have been many suggested avenues that the state could take in order to address these issues. Some policies such as clarifying guidelines and conducting high profile enforcement are much easier to facilitate than others. Others call for legislative action to ensure lasting solutions to avoid future issues. These, too, can prove to be fairly acceptable to many New York legislators, which include legislation that presumes employee status based on set standards or extending employee protections to independent contractors. This would eliminate many of the issues that arise because of imprudent or malign employers. The state has a responsibility to protect its citizens from both types of employers and there are direct measures it can and should take to remedy the situation.