Worker misclassification—when employers classify workers as “independent contractors” instead of “full-time employees”—is a massive problem among the self-employed. Steps have been taken in recent years to improve the situation, but new issues have arisen as well.
If you’re self-employed or hiring independent contractors, here’s everything you need to know about worker misclassification.
Effects Of Misclassification
Why do employers misclassify workers? Typically, because independent contractors are cheaper—but only for the employer. Anywhere from 10% to 30% of independent contractors might be misclassified—and the costs are enormous. On average, misclassified workers lose almost $17,000 per year in lost income—which they might not even know about.
“Workers suffering from this may or may not know they have been misclassified, and sometimes they don’t think there’s anything that can be done about it,” says Eric Dirnbach, a union researcher and organizer of 20 years. “Workers are sometimes misclassified as independent contractors, when they should be regular employees on the payroll. It leads to a more precarious job and deprives them of the right to a minimum wage and overtime pay, contributions to social security, workers compensation, and unemployment insurance.”
Worker Misclassification Across Industries
According to a 2022 study, landscapers, truck drivers, home health aides, janitors, and nail salon workers are at the highest risk of misclassification—but the issue is incredibly widespread.
“In my opinion, misclassification is a major problem in media,” says David Hill, Vice President of the National Writers Union. “It’s so bad, people have adopted their own portmanteau to describe it: ‘permalance.’ Essentially this is anyone who is working on a long-term, regular basis for a company on a contract and paid on a 1099. But even the basic role of a freelance writer is, in a way, indistinguishable from the work of staff writers at the publications we freelance for.”
Dirnbach echoed his sentiment—and said that some demographics are at higher risk than others. “I follow the construction industry and it happens a lot, especially for immigrant workers. This kind of misclassification also happens along with wage theft and other violations.”
The government has acknowledged the issue. In October 2022, the Department of Labor published a Notice of Proposed Rulemaking to revise the determination of who is an employee or independent contractor under the Fair Labor Standards Act. While different parties disagree on exactly what steps should be taken, awareness on a federal and state level is a key step towards ending the practice.
“Organizing workers into unions and better enforcement at the various Departments of Labor is essential,” says Dirnbach. “When unions encounter this during a campaign, information comes out about how workers have been misclassified, and we can get that to stop. Some states have set up task forces to deal with this issue, such as [this one in] New York, and the NELP group.
But legal action alone can’t solve the entire problem—and sometimes, the legislation has unintended side effects. “A lot of scaremongering has taken place since AB5 in California,” says Hill, referring to a bill that would turn some contractors into employees.
“Groups who want to see those kinds of laws undone are making freelancers think our livelihoods are in jeopardy,” he adds. “As a result, you’ll see a lot of freelancers decry any legislation that tries to limit how much or in what way a company is allowed to offload its work onto independent contractors.”
What Misclassified Workers Can Do
And the problem of misclassification may be getting worse—in part because of the nature of their work. “In the past, freelancers were used to write stories or do work that was unique to them as writers, that staff writers at a publication couldn’t do themselves,” says Hill. “Today, freelancers are used for everything. It’s much cheaper for a company to do it that way. And as a result, both freelance rates and staff pay have plummeted over the last 20 years. We are very likely to see more misclassification in more and more industries. It’s just a matter of time before [companies] figure out how to take it another step and make every worker an independent contractor.”
However, it’s not a lost cost—misclassified workers have some recourse. “If someone is misclassified and as a result are being denied overtime or minimum wage based on the hours they have worked, they should report this to the Department of Labor Wage and Hour Division. They also could contact an employment law attorney if they want to sue,” says Hill. “If someone is misclassified and they believe their employer owes unemployment, workers comp, or other taxes, they can anonymously report their employer to their state department of revenue or labor. Different states will have different guidelines.” He says that he recommends workers keep records of hours worked and communication with employers.
And there are organizations that help misclassified workers. “It’s worth mentioning worker centers as a good resource,” says Dirnbach. “There’s a great resource that was started during the pandemic called the Emergency Workplace Organizing Committee, which helps workers with organizing, and can also try to help with other issues too, like connecting them with resources.”
It’s a complicated problem that’s unlikely to have a quick fix, but misclassified workers do have rights, and there’s some hope for ending the practice.