Background
In 2009, The American Recovery & Reinvestment Act, better known as the 2009 Stimulus Package, infused $840 billion into the US economy. Of the $840 included in the 2009 stimulus package, $52 million was given to the North Carolina Housing Finance Agency for development of affordable housing. Federal backing for these projects created a huge amount of work during a sluggish economy with a serious lack of activity in construction sector. The competition to win these jobs pinned subcontractors against each other, which created an atmosphere where in order to compete many began to cut corners. One of the ways they would cut corners was to submit a lower 
competitive bid by classifying their workers as independent contractors rather than employees. However, classification of workers is not supposed to be a choice but instead should follow a set of federal guidelines. Failure to properly classify a worker has consequences some subcontractors and workers may not be aware of. The Charlotte Observer and The News and Observer (Raleigh) underwent a year- long investigation into the practice of misclassification of employees and each featured a multiple part series during 2012 and 2014 highlighting their findings.
Impact
From 2009-2013 the Department of Housing and Urban Development helped fund over 60 new construction or rehabilitation projects worth over $1 million each. 45% of the 826 companies working on these projects withheld no taxes from their hourly workers. Investigators estimate that in NC alone the mischaracterization of employees as independent contractors caused $467 million in lost tax revenue and $134 million was from lost state income and unemployment taxes. When an employee is improperly classified as an independent contractor, no unemployment taxes, no federal or state income taxes, no social security and no Medicare taxes are withheld from a worker’s paycheck. Independent contractors are supposed to file their own taxes by using a 1099 form. This is a problem when an employee is improperly classified as an independent contractor because the wages paid often do not provide the workers with enough money to pay their own taxes and keep up with their expenses. Those improperly classified as independent contractors who do pay their taxes either end up paying twice the amount they would play if properly classified as an employee or under report their earnings, therefore shifting the burden onto other taxpayers.
Not only are independent contractors required to pay their own taxes but they also cannot receive unemployment compensation. This is a big problem for many in the construction industry as during the winter months it can be more difficult to find work. Subcontractors are also not required to provide independent contractors with worker compensation, which shifts the burden to the misclassified workers to take care of their own work-related injuries.
Enforcement
Until recently misclassifications issues have gone largely unnoticed. Enforcement has stepped up under Vice President Joe Biden’s Middle Class Task Force. Since 2010 over $20 million in back wages for nearly 27,000 misclassified employees have been recovered. President Obama’s 2015 budget proposal includes almost $14 million to combat the misclassification of workers.
This summer, President Obama’s Fair Pay and Safe Workplaces Executive Order will now require those applying for federal contracts to submit any labor violations within the prior three years.
Additionally, several states have created task forces to crackdown on employee misclassification. New York and Illinois are two of the most successful crackdowns on misclassification. In NY alone, the task force uncovered over 24,000 instances of employee misclassification in 2013.
Next week, in Part 2, we will review ways to potentially avoid or fix the problem.