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Center for Social Policy
McCormack Graduate School
University of Massachusetts Boston
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Phone: (617) 287 5550
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| Misclassifying
contractors 'costly' |
Author(s):
Tux Turkel, Portland Press Herald Writer
Source(s):
The Construction Policy Research Center of Harvard School of Public Health and Harvard Law School
Date: April 26, 2005
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At least one in seven Maine construction companies misclassifies workers as independent contractors,
a practice that costs the state between $2.6 million and $4.3 million a year in uncollected income
taxes, according to a study released Monday.
Employers engage in this practice to avoid payroll taxes and mandated benefits, the study suggested.
That can help them undercut competitors when bidding on contracts.
Misclassification is a bad deal for workers, too, because they lose access to unemployment benefits
and correct levels of workers' compensation insurance.
While acknowledging problems, a trade group representing commercial builders in Maine criticized
the study. It said the work was instigated by organized labor, which is trying to expand its
presence in Maine's construction industry.
Researchers from the Construction Policy Research Center, part of the Harvard School of Public
Health and Harvard Law School, completed the study. Francoise Carre, research director at the
Center for Social Policy at the University of Massachusetts in Boston, presented the report in a
legislative hearing room filled with contractors, union officials and other interested parties.
The findings reflect those of a similar study the researchers did in Massachusetts and released
there last December. A third study is under way in New Hampshire.
The Maine study has prompted Gov. John Baldacci to ask Laura Fortman, the state's labor
commissioner, to form a task force that will recommend ways to beef up education and enforcement
of contractor classification laws. The working group, which is likely to include contractors,
organized labor, builders and insurance representatives, is expected to finish by year's end.
"Everyone knew this was an issue," Fortman said. "This study provides some good baseline data
for us."
Previous studies by the U.S. General Accounting Office and the U.S. Department of Labor
indicate that billions of dollars of revenue linked to misclassification may be lost each year.
The Harvard researchers said the problem of worker misclassification is an extension of the
underground economy in construction, where some employers label their work force as independent
contractors to avoid tax payments and insurance premiums.
"Employers that pay the appropriate taxes and insurance fees operate at a competitive
disadvantage," the researchers said.
"Insurance carriers lose premiums; misclassified workers function outside the umbrella of legal
protections, such as overtime, unemployment, and workers compensation benefits; and federal and
state governments lose substantial revenues in income tax and unemployment tax payments."
But the motivation for the Maine study was questioned Monday by the trade group representing
commercial builders in Maine.
The Associated Constructors of Maine has 300 member companies that employ more than 10,000
workers, building roads, bridges, schools and other heavy construction projects. Scott Tompkins,
the association's deputy director, said his group acknowledges that misclassification takes
place, but doesn't believe it's as widespread as the study suggests.
Part of the problem, he said, is that differing federal and state regulations make it unclear
who qualifies as an independent contractor.
Tompkins also charged that the studies were instigated by organized labor. Tompkins noted that
the federal funding for the Maine study came through an agreement with the Center to Protect
Workers' Rights, an affiliate of the AFL-CIO in Silver Spring, Md.
The goal, he reasoned, is to force firms to bring more workers onto their payrolls, even if
the workers are legitimately employed as independent contractors. That would increase costs for
Maine's commercial builders, the vast majority of whom have open-shop hiring practices, and
make it easier for heavily unionized firms in Massachusetts to compete here.
"It's really kind of a smokescreen," Tompkins said. "It's part of a concerted effort to gain
market share for these out-of-state interests."
Carre, the University of Massachusetts presenter, said the figures are unbiased and are pulled
directly from state audits. Researchers are focusing on the construction industry, she said,
because previous studies show a high rate of misclassification. Also, higher-than-average
accident rates in construction underscore the risks of inadequate workers' compensation, she
said.
The study relied on recent audit data from the Maine Department of Labor and Bureau of
Unemployment Insurance. From 1999 to 2002, at least one in seven Maine construction employers
- 14 percent - was estimated to have misclassified independent contractors.
That estimate translates into at least 748 construction firms statewide, the study said. The
actual number of workers affected was at least 3,213.
Misclassified workers lose out on unemployment compensation. The overall system loses
contributions estimated at more than $314,000 over the four years studied. At tax time,
the state loses income tax revenue. The actual amount isn't clear, but depending on
estimates of how much of the income of misclassified workers isn't reported, the total
ranged from $2.6 million to $4.3 million a year.
In working to reform the system, Fortman said, Maine would look to other states that have
targeted enforcement and increased education to make sure employers understand their
responsibilities under labor law.
Staff Writer Tux Turkel can be contacted at 791-6462 or at:
tturkel@pressherald.com
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