Why Classification Matters

Misclassification of employees as independent contractors robs workers of thousands of dollars per year and reduces revenue for social safety net programs, according to a new Economic Policy Institute analysis of 11 commonly misclassified jobs.

The report estimates that as many as 10% to 30% of employers misclassify workers as independent contractors. That leads to those workers missing out on critical protections, benefits, and labor rights, including minimum wage, overtime pay, unemployment insurance, the right to form a union, and anti-discrimination protections in most states.

Additionally, these workers must bear the full financial costs of Social Security and Medicare contributions, rather than split it evenly with their employer.

The report, which focuses on state-level reports on employee misclassification, estimates that social insurance systems can lose up to 30% of per-worker revenue when workers are misclassified as independent contractors because independent contractors make no contributions to unemployment insurance and workers’ compensation systems.

For example, a typical construction worker misclassified as an independent contractor would lose as much as $20,399 in annual income and job benefits compared with what they would have earned as an employee.

Lost compensation due to misclassification varies by state. Estimated annual per-worker costs in lost compensation are as high as $31,326 for truck drivers in New Jersey. On average, misclassified workers stand to lose more in higher-wage states and occupations.

The report noted that construction workers, truck drivers, and home health aides are some of the commonly misclassified jobs. Also, the issue disproportionately impacts people of color, women, and immigrants, who are more likely to be in occupations where misclassification is common.

Given the high stakes of misclassification for workers’ access to fundamental rights and protections, embedding strong legal definitions in state and federal law is fundamental to ensuring that employees are not improperly classified as independent contractors, the report’s authors said.

“Illegal misclassification of employees as independent contractors deprives workers of their labor rights, slashes their pay, and undermines funding for crucial social safety net programs,” said Nina Mast, EPI economic analyst and co-author of the report.