Worker Misclassification Costs Washington $30M Annually in Lost Unemployment Taxes

Nearly 45,000 workers in the state are misclassified as independent contractors each year, new study finds
Updated: Thu, 01/30/2020 - 12:17
  • Nearly 45,000 workers in the state are misclassified as independent contractors each year, new study finds

The expanding gig economy offers great flexibility for employers and many workers alike, but it also has an ugly underbelly that is costing thousands of workers pay and benefits and bilking Washington state coffers out of millions of dollars each year, a new study says.

The culprit is the misclassification of workers as independent contractors as opposed to treating them as company employees, according to the report by researchers with the Harvard Law School’s Labor and Worklife Program. The study found that between 2013-2017, the state of Washington lost $152 million in unemployment taxes and the state’s workers’ compensation system lost $268 million via unpaid premiums.

“During the five-year period from 2013 to 2017, a conservative estimate of the average worker misclassification rate was 1.3%,” the study notes. “This translates into an average of 44,492 misclassified workers each year, based on an average total workforce of 3,368,815 in the state of Washington.”

Additionally, nearly $300 million payroll taxes for Social Security and Medicare were lost due to worker misclassification in Washington as well as an additional $9 million in federal unemployment insurance tax. There is a considerable incentive for some employers to consider misclassifying workers, given the practice can produce savings of up to 30% in labor costs, the study notes.

“Employers that misclassify their workers as independent contractors ― intentionally or not ― cheat their workers out of wages and other protections and benefits those workers have earned,” says Washington Attorney General Bob Ferguson. “This problem is not new, but this Harvard Labor and Worklife Program report shines a light on the degree to which this problem impacts Washingtonians. According to Mark Erlich and Lisa Xu’s research, the percentage of Washington employers who engage in misclassification nearly tripled between 2008 and 2017 ― that’s unacceptable.”

Construction, clerical services, and hotels and restaurants represent the three sectors where worker misclassification is most prevalent. In Washington, the higher incidences of worker misclassification, according to the study, are found in the northwestern metropolitan regions of the state ― King, Skagit, Snohomish and Whatcom counties.

The Harvard researchers stress that legitimate reasons exist for classifying workers as independent contractors, but point out that their study focused on workers who “function as employees” but are misclassified as contractors by their employers in order to save the company money on labor costs, “thereby violating employment laws.”

Certainly, there are legitimate independent contractors in the economy, but this and other similar studies focus on those workers who function as employees but are misclassified by their employers as independent contractors in order to realize cost savings by evading tax and insurance obligations, thereby violating employment laws.

“The rise of the gig economy has brought increasing attention to the study of worker misclassification and its effects on federal and state tax revenues and worker conditions,” study co-author Erich says “Workers, responsible employers and taxpayers pay a price when misclassification occurs. It is a form of fraud that demands correction.”

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