According to a recent report issued by the Fiscal Policy Institute (“FPI”), approximately 50,000 construction workers in New York City are misclassified as independent contractors or employed by construction contractors completely “off the books.” The finding is based on discrepancies between census data and state and federal payroll records, which indicate that nearly one-fourth of the city’s 200,000 construction workers are not paying taxes.

The Growing Problem Of Worker Misclassification

The FPI report estimates that misclassification of workers cost New York taxpayers $489 million in 2005; that amount may reach $558 million in 2008. These costs reflect the fact that, when workers are classified as “independent contractors” rather than “employees,” their employers are not required to pay unemployment insurance taxes, workers’ compensation premiums or the employer’s portion of Social Security and Medicare taxes. Independent contractors are also exempt from minimum wage and overtime laws and most discrimination and occupational safety laws.

Given the amount of money at stake, the report is likely to add momentum to New York Governor Elliot Spitzer’s efforts to “to curb misclassification through tougher enforcement.” Efforts taken thus far include the creation of a task force last September to strengthen enforcement measures and help coordinate interagency investigations of employers suspected of misclassifying workers. The state also enacted a new law that requires employers to have written contracts for commission salespeople. Failure to comply with the requirement creates a presumption in favor of the employee in any disputes over payment of wages or commissions.

Other states have taken similar steps to crack down on worker misclassification, including new laws in Illinois and New Jersey that create enhanced civil penalties for violations and, in some cases, criminal sanctions. 

What Employers Need To Do To Avoid Problems

To avoid liability for misclassification, putative employers are advised to review how they classify their workers. Although courts in recent years have ruled that the parties' agreement to create an independent contractor relationship is "completely irrelevant," as a practical matter, such agreements do have value in establishing the parameters of the relationship.

The key is to ensure that the “economic realities” demonstrate independent contractor status. For instance, if the employer exerts a high degree of control and supervision over the worker and pays most of the expenses, then the worker is less likely to be deemed an independent contractor. Thus, an agreement evidencing the worker’s autonomy and highlighting the difference between the relevant parties’ relationship with that of employment relationships will help to safeguard employers from potential liability for worker misclassification.