Employee misclassification occurs when a worker is paid as something other than an employee, such as an independent contractor, when by law that worker is really an employee.
One of the differences between an employee versus an independent contractor is how these workers are paid. An employee is a “W-2 employee” if he or she is on an employer payroll and having payroll deductions and tax contributions made on his/her behalf by the employer. Conversely, an independent contractor is solely responsible for his/her own tax contributions. Employee misclassification is a form of employer fraud that has many ramifications. Misclassification reduces an employer’s labor and related costs, thereby allowing a business to significantly underbid competitors. When a company misclassifies its workers, it is misrepresenting the true nature or size of its business to its insurance provider and various government organizations. Although employee misclassification can be the result of a misunderstanding of the law, it frequently occurs when an employer is looking for ways to cut costs. This tactic is illegal and unfair.
Misclassified employees are part of the “underground economy.” The underground economy is a term that refers to those individuals and businesses that utilize tactics to conceal their employment activities to abscond from one or more of their employer responsibilities related to wages, payroll taxes, insurance, licensing, safety, and other regulations. The underground economy includes related activities commonly known as tax evasion, payroll fraud, under-the-table work, and wage theft.
Whenever a business operates outside the legitimate economy it may do so to avoid taxes, safety regulations, wage laws, and required insurance policies (i.e. workers’ compensation insurance). Such businesses may also avoid paying their fair share of taxes. Tax revenues are required for the state to provide basic services to its residents. Taxpayers become unduly burdened by these illegal activities, as many workers who are misclassified are paid below minimum wage, or are without employer-provided benefits. These workers then must utilize existing social safety nets that were not intended to support people working full-time jobs.
When added together, operating outside the law allows these businesses to:
• have an unfair advantage by illegitimately lowering costs so they can underbid all others;
• take business away from law abiding businesses and their employees who are trying to make an honest living;
• weaken our social fabric, economic stability, and working conditions in the Commonwealth.
FOR QUESTIONS OR TO REPORT CONCERNS, CONTACT THE JOINT TASK FORCE ON THE UNDERGROUND ECONOMY AND MISCLASSIFICATION:
Call: 1-877-96-LABOR (1-877-965-2267)