New report shows that misclassifying workers as independent contractors is costly for workers and states

Misclassification of employees as independent contractors robs workers of thousands of dollars per year and reduces revenue for social safety net programs, according to a new Economic Policy Institute analysis of 11 commonly misclassified jobs.

Workers misclassified as independent contractors lose out on critical protections, benefits, and labor rights including the minimum wage, overtime pay, unemployment insurance, the right to form a union, and anti-discrimination protections in most states. Additionally, these workers must bear the full financial costs of Social Security and Medicare contributions, rather than split it evenly with their employer.

Construction workers, truck drivers, and home health aides are some of the commonly misclassified jobs analyzed in the report. A typical construction worker misclassified as an independent contractor would lose as much as $20,399 in annual income and job benefits compared with what they would have earned as an employee. A typical truck driver, if misclassified as an independent contractor, would lose as much as $23,266 annually.

Lost compensation due to misclassification varies by state. Estimated annual per-worker costs in lost compensation are as high as $31,326 for truck drivers in New Jersey. On average, misclassified workers stand to lose more in higher-wage states and occupations because W-2 earnings are greater, but losses are substantial in all states-as accompanying state fact sheets show.

Misclassification does not just shift the full burden of social insurance to workers-it also reduces the total revenues received by the social insurance system. The report estimates that social insurance systems can lose up to roughly 30% of per-worker revenue when workers are misclassified as independent contractors. This is because independent contractors do not contribute to unemployment insurance and workers' compensation systems, and because they may earn less than they would as employees (and lower pay translates directly into lower contributions).

Embedding strong legal definitions-like the ABC test-in state and federal law is fundamental to ensuring that employees are not improperly classified as independent contractors. These strong legal tests must also be paired with strong enforcement mechanisms to uphold workers' rights and deter employers from violating the law.

"Illegal misclassification of employees as independent contractors deprives workers of their labor rights, slashes their pay, and undermines funding for crucial social safety net programs," said Nina Mast, EPI economic analyst and co-author of the report. "Policymakers at the federal, state, and local levels should act to curb misclassification and enforce the rights to which all workers should be entitled."