NEW YORK - When construction slowed during the recession, some companies hired workers and wrongly designated them as independent contractors to avoid paying insurance, taxes, fair wages and overtime.
Danny Odom, chief operating officer of Odom Construction Systems Inc. in Knoxville, Tenn., says he wouldn’t even though the decision put the company of about 225 employees at a disadvantage as the practice would shave about 30 percent off his labor costs. He testified in support of legislation that went into effect July 1 allowing the state to fine competitors who misclassify employees.
“It’s principle for us,” Odom said in an interview. “We weren’t willing to stick our heads in the sand. It’s exploiting those guys and we just don’t want to make money off of people that are being exploited.”
States from New York to California are taking steps to crack down on employers who improperly classify their workers or fail to declare their income. Thirty states have laws on worker misclassification, up from 23 in 2010, according to Construction Citizen, a website that says it seeks to advance social responsibility in the industry.
“There was money to be had,” Linda Donahue, senior extension associate with The Worker Institute at Cornell University in Ithaca, N.Y., said in an interview. “The success at identifying those employers has led to pretty substantial revenue for the states.”
An employer can save on average $3,710 annually in employment taxes for each worker earning a salary of $43,007, according to a June 14 report from the Treasury Inspector General for Tax Administration.
“The misclassification of employees as independent contractors is a nationwide problem affecting millions of workers that continues to grow,” according to the report.
To recover lost revenue states must first identify such workers. In May, Connecticut said that after a 12-month audit it had reclassified 3,487 workers and uncovered $68.2 million in unreported payroll representing $1.3 million in lost payroll taxes. In February, a New York state task force said it found 20,200 instances of workers treated as contractors in 2012, representing more than $282.5 million in unreported wages.