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The True Cost of Misclassification

Photo of a female dishwasher working in a restaurantAs we focus on essential protections for essential workers, a fundamental step in that effort is ensuring that employers treat workers as employees.

A common violation we encounter in our investigations is the misclassification of employees as independent contractors. For example, a restaurant employer may misclassify a dishwasher as an independent contractor. Then when that dishwasher works 65 hours per week, the employer (illegally) avoids paying overtime for the extra 25 hours.

Unfortunately, the true cost of this practice goes far beyond the 25 hours of pay the employer stole.

Misclassification denies employees access to critical benefits and protections they are entitled to – overtime, the minimum wage, family and medical leave and, in some cases, safe workplaces. It generates substantial losses to the U.S. Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers’ compensation funds. It cheats every taxpayer. It undermines the entire economy.

In fact, the misclassification of employees as independent contractors presents one of the most serious workplace problems in our economy today. That’s why the U.S. Department of Labor recently withdrew an independent contractor rule published in January that, had it gone into effect, would have further contributed to the erosion of worker protections.

Some people argue that classifying workers as independent contractors gives the workers more flexibility. But low wages, unpredictable schedules and a lack of job security is not flexibility. Most workers seek predictability and income security with the a ability to address unexpected events – like a child home sick from school – without losing their job, and employers can choose to offer schedules that meet the needs of their employees. This can be accomplished within the employer-employee relationship. Put another way, workers shouldn't have to give up basic legal protections and livable wages to have a schedule that meets their needs. 

Misclassified low-wage workers also are subject to exploitation. Minors, migrant and seasonal laborers, immigrants with limited English proficiency and other vulnerable workers are subject to disparate treatment and wages because they are afraid of retaliation if they exercise their workplace rights.

Misclassification also creates a competitive disadvantage for employers who comply with the law, resulting in an uneven playing field in the marketplace.  

Basic federal labor law protections for employees are essential to a healthy economy. The overtime pay requirement, for example, spurs job creation because it spreads available employment opportunities by encouraging employers to hire more workers. Both the minimum wage and overtime pay allow workers to earn enough to support their families. That purchasing power helps businesses succeed and hire more workers, sustaining our economy. 

The Wage and Hour Division is committed to combating misclassification and is focused on sectors where we know workers are vulnerable and violations are rampant, including construction, nursing and home care, janitorial, landscaping and restaurants, among others. And this focus is making a difference. For example, we recently recovered more than $350,000 in back wages for 50 workers misclassified as independent contractors by a Tennessee home health care service provider, resolving overtime violations found during one of our investigations. The employer had intentionally misclassified the workers as independent contractors and then paid them straight-time wages for the hours they worked in excess of 40 in a workweek, under the false pretense that overtime rules did not apply.

The costs of misclassification are high and widespread. As a nation, we can’t afford to ignore it.

Have a question about wage and hour laws? Call the division’s toll-free help line at 1-866-4-USWAGE (1-866-487-9243) or contact us online.

Jessica Looman is the principal deputy administrator for the U.S. Department of Labor's Wage and Hour Division. Follow the division on Twitter at @WHD_DOL.

 

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