Report Shows Labor Misclassifications

Between 14 and 24 percent of employers in the Massachusetts construction industry classify their workers as independent contractors—a designation that reduces payroll taxes and allows companies to avoid providing mandated benefits, according to a report authored by a Harvard research center.

The Construction Policy Research Center, a subgroup of the Labor and Worklife Program which is a joint venture between the Law School and the School of Public Health, penned the report entitled “The Social and Economic Costs of Employee Misclassification in Construction” and released it on Monday.

The report found that when construction employers misclassified workers, they tended to do so for a large part of their workforce. Elaine Bernard, executive director of the Labor and Worklife Program, said that among firms that misclassified workers, an average of 48 percent of employees were treated as independent contractors even though they were actually employees.

The Construction Policy Research Center started work on the report last year. However, gathering information proved difficult as the committee did not have access to tax returns, which are sent to the government. Instead, the committee examined the difference between the number of workers companies reported and the amount of unemployment insurance money they collected. When the numbers did not match up, the committee labeled that construction company as misclassifying its workers.

According to Bernard, members of the Construction Policy Research Center knew that some employers engaged in the practice. One of the goals of the report was to quantify the extent of the trend.

The report provides low and moderate estimates because the researchers looked at two samples of construction companies: those that were the subject of random audits and those that were the subjects of both random and targeted audits.

Depending on the estimate used, between 2,364 and 4,459 employers misclassified at least some workers. Between 7,478 and 15,790 construction workers were directly affected, or between 5 and 11 percent of construction workers statewide. Financially, the practice in the construction industries has deprived Massachusetts of between $1 million and $3.9 million in unemployment insurance.

Bernard said that the Labor and Worklife Program can now decide to formulate public policy recommendations, focus on similar reports in other industries, or try to analyze the problem in other states. The report recommends that a similar study be performed to analyze state tax returns, currently under the control of the Massachusetts Department of Revenue.

According to Bernard, Rep. John Tierney, D-Mass., wrote a letter to the General Accounting Office asking that it conduct a study examining worker misclassification on a national scale.

The report also discusses the phenomenon across all industries in the state and predicts that between 13 and 19 percent of all employers misclassify their employees.

“It’s interesting to find an area where businesses, government and organized labor are sitting on the same side of the table,” Bernard said.