The Hill - Misclassifying Employees Rips Off Workers and Taxpayers and Undermines Fair Competition (Rep. Lynn Woolsey)

Op-Ed

By Rep. Lynn Woolsey

"Employee misclassification" may sound like an arcane accounting snafu that only people who squint at ledger books all day would be interested in.

In reality, however, it is an enormous economic and social problem.

Misclassifying workers as independent contractors when they are in fact employees strips them of rights and protections they deserve, undermines fair competition and leaves taxpayers holding the bag.

In 2006, the Governmental Accountability Office estimated that more than 10 million workers were misclassified. These workers, who are really employees, have been counted as independent contractors because their employers want to avoid the costs associated with employees, such as Social Security and Medicare payments, vacation, sick leave, and pensions.

Misclassified workers also lose other labor protections accorded employees, such as minimum wage guarantees and overtime protection.

The number one reason that employers misclassify is to avoid paying workers compensation premiums and to avoid workplace injury and disability disputes.

So if a worker gets seriously injured--and this practice affects mostly low-income workers--that worker will have no income, no workers compensation benefits and likely no health insurance to help with medical expenses.

In my home state, California, at least 30 percent of workers are misclassified as independent contractors.

Workers are not the only ones harmed by misclassification--honest contractors are as well.

At a recent hearing of the Education and Labor Committee's subcommittee on Workplace Safety, which I chair, a representative of the Mason Contractors Association of America estimated that companies that misclassify their workers expect to reduce labor costs as much as 30 percent.

This puts honest contractors at a real disadvantage, which threatens their bottom line, their business and the security of their employees.

And there is one more big loser in misclassification--taxpayers.

The IRS estimates that about $2.7 billion are lost a year in unpaid taxes by employers who misclassify their employees.

To crack down on this problem, I have introduced the Employee Misclassification Prevention Act, H.R. 5107, known as EMPA, with Reps. George Miller (D-Calif.) and Rob Andrews (D-N.J.) as original co-sponsors. Sen. Sherrod Brown (D-Ohio) has introduced the same bill in the Senate, S. 3254.

The bill:

* Requires employers to keep records that reflect the accurate status of each worker.
* Increases penalties on employers who misclassify their employees and are found to have violated employees' overtime or minimum wage rights.
* Requires employers to notify workers of their classification as an employee or non- employee
* Creates an "employee rights website" to inform workers about their federal and state wage and hour rights.
* Provides protections to workers who are discriminated against because they have sought to be accurately classified.
* Mandates that states conduct audits to identify employers who misclassify workers and requires that the Department of Labor monitor states' efforts to identify misclassification.
* Directs states to strengthen their own penalties for worker misclassification.
* Permits the Department of Labor and the IRS to refer incidents of misclassification to one another.

President Obama is also concerned about this problem, and in his latest budget complements EMPA by proposing an independent contractor initiative of $25 million for Department of Labor and Treasury Department activities to address misclassification.

Legitimate independent contractors play an important role in our economy and many companies make good use of their services.

Other companies, however, that misclassify employees as independent contractors have been ripping off their workers, honest competitors and taxpayers for years.

It is high time to put a stop to it.

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