Study: Workers Misclassification Hurts Everyone


January 16, 2014


A policy think tank has a new fact sheet that shows that worker misclassification is a serious problem everywhere – even in states with relatively strong labor protections, like Oregon.


Worker misclassification, or payroll fraud, occurs when an employer labels a worker an “independent contractor” rather than an employee. It cheats employees out of workplace rights, including overtime pay, labor rights and minimum wage, while costing the state and federal government billions in unpaid Social Security and Medicare taxes.

“Misclassification undermines collection of unemployment insurance, workers’ compensation and transit taxes. In addition, the state loses income tax revenue — nearly all of which goes to fund schools, public safety and programs that protect the vulnerable,” according to the fact sheet by the Oregon Center for Public Policy.

A recent audit by the state legislature revealed more than 1,000 illegally classified workers across Oregon.  Nationwide it is estimated that the share of employers engaged in payroll fraud is between 13 and 24 percent.

Worker misclassification hurts honest employers as well by putting them at a competitive disadvantage, reports the center.


 By skirting their legal obligations, cheating employers undercut law-abiding competitors. [State officials] estimates that for every $100 in payroll costs, Oregon employers who misclassify employees save nearly $5 in state unemployment insurance, workers’ compensation insurance premiums and transit taxes. But there is more. Looking at national data, the Internal Revenue Service calculates that misclassification saves an employer, on average, about $3,700 in employment taxes.

More than 20 states have introduced legislation to crack down on abusers, including Oregon, where Gov. John Kitzhaber signed a bill last spring that gives the state the right to the suspend or deny the business license of any construction contractor found guilty of misclassification.

Click here to read the factsheet.