Worker Misclassification Is Costing Both Workers and States

The practice of misclassifying workers as independent contractors is a pervasive trend that gives workers all the obligations of a job without the labor rights and compensation they deserve. 

Previous estimates suggest 10–30 percent of employers misclassify at least some employees as independent contractors — and it costs workers and our social safety net thousands of dollars per year.

There are workers, of course, who are truly independent contractors in our economy. An independent contractor typically decides when and how to do their work and is ultimately responsible for delivering the final product or service. 

In contrast, a misclassified independent contractor takes on many of the obligations typical of an employee — working primarily for one employer, abiding by set hours, being directly supervised — yet lacks the essential protections and benefits that come with proper employment status. In particular, misclassified workers are robbed of the right to anti-discrimination protections, a guaranteed minimum wage, overtime pay, unemployment insurance, workers’ compensation, and the right to join and form a union.

Our new fact sheet at the Economic Policy Institute quantifies the costs of independent contractor status for 11 commonly misclassified jobs. A typical construction worker, for example, would lose as much as $19,527 (33 percent) per year in income and job benefits as an independent contractor compared with what they would have earned as an employee. A typical truck driver would lose as much as $21,532 (36 percent) per year in income and job benefits as an independent contractor compared with what they would have earned as an employee.

The numbers are similarly grim for other commonly misclassified jobs like home health care aides, janitors, and landscapers, which are on average low-paying jobs. Misclassification leaves these workers vulnerable to exploitation and harmful labor practices.

Misclassification also represents a loss to federal and state social insurance funds. Typically, when a worker is misclassified as an independent contractor, the entire cost of Social Security and Medicare contributions (15.3 percent of earnings) is shifted to the worker, but no contributions are made to federal and state unemployment insurance (UI) and workers’ compensation funds. 

Assuming a misclassified independent contractor receives no health or retirement benefits, total contributions to social insurance can drop by 17 percent to 30 percent. Given the pervasiveness of misclassification, this amounts to a substantial loss to state UI trust funds and workers’ compensation programs, ultimately weakening the safety net for all workers.

Business interest groups and trade associations often frame efforts to curb misclassification as attacks on independent contracting as a whole. However, this is a false dichotomy. The reality is that independent contracting can coexist with clear classification standards that ensure workers are not deprived of their basic rights and pay. 

Federal, state, and local policymakers can and should act to curb misclassification and protect workers’ rights. This should include establishing or expanding the use of a strong, uniform protective legal test for determining employee status like the “ABC” test, strengthening enforcement of wage theft and misclassification, and extending basic wage and hour protections to independent contractors. 

All workers deserve stable, good-quality jobs with guardrails against abuse and discrimination. The misuse of the independent contractor model through misclassification creates a loophole that lets employers sidestep fair pay and basic rights, leaving workers without the security they’re owed while simultaneously eroding the foundation of public services.