Worker misclassification occurs when some employers classify their workers as independent contractors rather than employees. This practice is becoming increasingly problematic in the labor market.
Employers misclassify workers for a variety of reasons. The practice is problematic in that it denies workers essential benefits and protections. It also lowers their income and fosters unfair competition.
How misclassification happens
A primary reason employers may misclassify workers is to reduce labor costs. Independent contractors do not get health insurance, overtime pay or paid time off. This saves businesses money. Some employers also misclassify workers to evade their legal responsibilities as employers. This includes avoiding payroll taxes, workers’ compensation and unemployment insurance contributions.
Employers may also prefer the flexibility of hiring independent contractors. These workers are not privy to the same regulations and requirements that apply to employees. Classifying workers as employees also involves extensive paperwork, tax withholding and compliance with various labor laws. Misclassifying workers as independent contractors can help employers sidestep these administrative burdens.
Why misclassification is harmful
Misclassified workers lose important benefits and legal protections. They may lack access to health insurance, paid leave and other benefits that can significantly impact their well-being. Independent contractors also typically earn less than employees for the same work due to the lack of benefits and overtime pay. This can lead to financial instability for workers.
Employers who misclassify workers also gain a competitive advantage over businesses that follow employment laws. This creates an unfair playing field in the job market. Misclassification also affects governments and taxpayers. When employers avoid payroll taxes, it can lead to lost revenue for government programs. This, in turn, places a heavier burden on taxpayers.
An estimated 30% of American employers have misclassified their workers. Increasing awareness of the problem may help mitigate the issue.