When’s a Worker a Contractor? When the Boss Wants to Cheat.

Everyone wants to “be his own boss,” right? That’s the American dream, we’re told. But when a real boss tells a worker she’s not an employee but an independent contractor—it’s simply a way to steal wages and cheat on taxes.

Worker centers in many states are seeking state and national legislation to strike back at such thieving bosses. And some lawmakers, with budgets strapped by the recession, are keen to find ways to haul in tax-shirking employers.

Mislabeled workers “suffer the worst of both worlds” according to the worker-rights advocacy group American Rights at Work. Not only do they lack control over their work, they are denied legal protections due to workers, including unemployment insurance, overtime pay, anti-discrimination laws, minimum wage requirements, and workers’ compensation.

The Department of Labor investigated nine states in 2000 and found that up to 30 percent of employees were misclassified, with about 3.4 million illegally called contractors. One study found this practice cost the federal government as much as $34.7 billion in taxes between 1996 and 2004.

Dozens of states are taking notice, too. In New York—where an estimated 10 percent of private sector employees are labeled contractors—state attorneys found that employers used the ruse to steal more than $12 million from workers in 2007. Ohio estimates a loss of $361 million per year from unpaid taxes and workers’ comp premiums.

In Austin, Texas, where up to 38 percent of construction workers are wrongly classified, the scam has cost the state more than $8 million in taxes and unemployment contributions, according to a study published last June by the Workers Defense Project.

LEARNING THE HARD WAY

The problem surfaces when workers need help recouping unpaid wages, says Veronica Mendez of the Interfaith Center for Worker Justice in Minneapolis.

Chicago construction worker Dariusz Jaworski discovered the scam the hard way. The boss never explained why he and two fellow construction workers filled out 1099 forms in 2006 designating them as contractors. It mattered little to them for years, but then paychecks became sporadic before stopping altogether. After waiting on the boss’s promises to pay up, the workers confronted him and were promptly fired.

They turned to Arise Chicago, a worker center with members in the construction industry, where they learned the ins and outs of labor law. They’re suing for non-payment of wages and the overtime pay denied them, totaling more than $70,000 for the three.

While their lawsuit is pending, the workers have joined Arise and are teaching other Polish construction workers how not to fall into the trap, including speaking out in the Polish-language media and passing out flyers denouncing their former employer’s tactics at the Polish Contractors and Builders Association Conference.

A recent Government Accountability Office report recognizes that the Department of Labor’s ability to educate workers is presently “limited,” leaving worker centers like Arise to pick up the slack.

BETTER LAWS

Jaworski’s suit was enabled by a 2007 Illinois law which worker advocates say will take a bite out of the estimated $164 million in unpaid unemployment contributions and taxes the state lost between 2000 and 2005. The law puts some teeth into existing wage theft statutes, carrying penalties up to $1,500 per misclassified worker per day.

The Illinois Department of Labor had received more than 100 such complaints as of last September, and announced in December that it’s seeking a $328,500 civil penalty in an 18-person case against a Chicago area contractor.

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Having a clearly written law on the books that includes steep penalties “is a tool to organize workers and put some leverage on the employer to resolve a wage theft problem,” says Arise’s Adam Kader.

Ambiguity in the law is great for unscrupulous employers. They shift tax responsibilities to workers themselves, often without making this clear, saddling workers with thousands in tax debt.

Avoiding unemployment insurance, benefits they provide to employees, and workers comp chops between 15 and 30 percent in payroll costs—and fires the starting shot in a race to the bottom that undercuts union workers and honest employers.

The Workers Defense Project in Austin, Texas, is advocating for a Construction Worker Protection Ordinance to more clearly outline how workers should be classified.

In Wisconsin, for example, the law distinguishes employees from contractors with a nine-point test, asking if workers have other contracts, work with their own tools, write their own schedules, and provide workers comp.

Colorado, Maryland, Massachusetts, New Jersey, and New Mexico have passed legislation to tackle misclassification in the construction industry, and several other states are investigating.

But when the work crosses state lines, enforcement is difficult. Federal laws, including one in 2008 co-sponsored by then-Senator Obama, have routinely died in committee.

Things may be changing, however. The Obama administration is proposing a $25 million initiative to boost the Department of Labor’s ability to identify and combat the scam, and could invest $7 billion into the fight over the next 10 years.

JANITORS AND DRIVERS, TOO

While construction workers are most likely to be labeled contractors, other industries are not immune. Court decisions socked FedEx with $14.4 million in fines in 2008. Thirty states are investigating misclassification at FedEx and the company faces at least 45 class action lawsuits—27,000 FedEx drivers could benefit.

Worker centers also report problems in janitorial services, where employers try to turn workers into franchise owners of their company. In these cases, workers desperate for jobs pile up franchisee fee debt with each “contract.”

Educating workers on their rights and challenging employers, worker centers are on the front lines, bringing misclassification to light in several states.

Because employers are beginning to recognize the growing legal risks of misclassification, threatening them with exposure has helped get stolen wages paid. Says Tim Bell of the Chicago Workers’ Collaborative, with increasing public attention and prospects of enhanced enforcement, the situation is “an organizing campaign waiting to happen.”