Companies that misclassify workers as independent contractors can save at least 16.7% on labor costs and they can underbid businesses that don’t misclassify in order to win projects, according to testimony before a US House subcommittee last week. However, potential legislation that targets misclassification will negatively affect businesses operating on the up and up.

Those were some of the comments made last Thursday during a hearing on independent contractor misclassification held by the Workforce Protection Subcommittee of the US House of Representatives’ Education and Labor Committee.

Misclassification “is too often used as a cost-cutting strategy by low-road employers to gain an unfair competitive advantage,” subcommittee chair Rep. Alma Adams, D-North Carolina, said at the start of the hearing.

Titled “Misclassification of employees: Examining the costs to workers, businesses and the economy,” the hearing included discussion on potential legislation referred to as the “Payroll Fraud Prevention Act.” According to testimony Thursday, that legislation could:

  • Require employers to provide workers with written notices of their classification; business that fail to provide proper notice will be presumed to be employers.
  • Establish civil penalties for violations of up to $1,100 per violation and up to $5,000 for willful violations.
  • Extend a private right of action to misclassified employees to recover lost wages.
  • Direct the US Department of Labor’s Wage and Hour Division to conduct audits of industries with frequent incidents of misclassification.

Employment protections. Independent contractors are excluded from several workplace protections, according to testimony from Sally Dworak-Fisher, an attorney at the Public Justice Center. These include minimum wage protections, unemployment insurance and workers’ comp. They are also not shielded by anti-discrimination laws or family and medical leave protections, and they lack right to collectively bargain.

“We regularly see low-wage home healthcare workers being forced to sign contracts saying they are ‘independent contractors’ even as they are assigned a pay rate and a work schedule by the home care business,” Dworak-Fisher reported.

Sometimes the term “independent contractor” isn’t used, but workers are required to form a limited liability corporation or a franchise company of one in order to get a job, she testified.

Karl Racine, attorney general of the District of Columbia, testified that misclassification shifts the tax burden to workers while letting companies, such as construction firms, underbid on projects compared to firms that don’t misclassify.

Companies can cut labor costs by at least 16.7% by misclassifying workers; 11.5% is from reduced worker take-home earnings and 5.2% comes from lost tax and social insurance payments, Racine testified.

Flexibility a mirage. Human cloud worker Maria Crawford, from Altadena, California, testified that she felt misclassified. Crawford works mostly through Instacart.

“I am told that the advantage to my type of work is the flexibility and freedom to set my own schedule,” she said. “I, in theory, can work any time and any day. The truth is my ‘flexibility’ is totally dependent on a very narrow window of time when most orders come in, usually around lunchtime and after 5. This means I have to compete with my coworkers for lucrative shifts. Often this means I get waitlisted.”

Crawford said she does the work because as a woman in her 50s, it has been difficult to find a new job despite more than a decade of experience in the IT field.

Enormous burden. But the Payroll Fraud Prevention Act proposal would place an enormous administrative burden on employers, some said.

“Lawful businesses will be forced to engage in a series of box-checking exercises that will benefit few, if any workers,” according to testimony from Alexander Passantino, a partner at law firm Seyfarth Shaw LLP. “Unlawful businesses are not likely to change their behavior in any meaningful way and thus few, if any, workers will benefit.”

Largest beneficiaries of such potential legislation would be plaintiffs attorneys and defense attorneys, he said.

Business would have to issue notices numbering in the tens of millions under such potential legislation, and they would have to be customized for each jurisdiction, according to testimony from Alexander Chemers, shareholder at law firm Ogletree, Deakins.

The cost for paperwork could be $37.5 million, Chemers estimated.

“I have found that companies are generally doing their best to classify workers properly as either an employee or independent contractor,” he testified. “There are always bad actors (just as there are employers who fail to pay minimum wage or overtime to persons who are classified as employees), but that is the exception and not the rule in my experience.”