A new report on worker misclassification has singled out construction, both for the scale of the problem and the magnitude of its impact in the industry.
Misclassifying employees as independent contractors carries significant financial consequences for workers, as well as for state and federal systems that rely on payroll-based contributions, according to the report from the Washington, D.C.-based Economic Policy Institute, a nonprofit think tank focused on economic justice.
While the issue spans multiple industries, construction stands out.
“Construction has the highest median annual earnings of the occupations we are comparing, so that can explain why the dollar amounts they ‘lose’ from misclassification are higher,” said Nina Mast, a policy analyst at the Economic Policy Institute and co-author of the report.
That distinction is important. Higher wages in construction mean that when workers are misclassified, the financial losses, whether in unpaid overtime, lack of benefits or missed employer contributions, are larger. So, when compared to lower-wage industries, the stakes are simply higher.
Costs of misclassification for contractors
The impact extends beyond workers. For nonresidential contractors, misclassification can distort the competitive landscape.
“When employers illegally misclassify their workers, they are able to substantially reduce their labor costs, which gives these unscrupulous employers an unfair advantage over law-abiding businesses,” Mast said. “This behavior by unscrupulous firms puts pressure on law-abiding firms to break the law in order to lower their labor costs, leading to a race to the bottom on labor standards, which is where the construction industry finds itself.”
For contractors bidding on commercial and institutional projects, that “race to the bottom” can have real consequences.
Firms that properly classify workers and therefore pay payroll taxes, workers’ compensation premiums and benefits correctly, often find themselves competing against companies that artificially suppress costs, according to Mast. The result can be distorted bidding processes, where the lowest bid is not necessarily the most compliant or responsible one.
The report also compares how construction stacks up to other industries. EPI estimates that misclassified construction workers lose roughly $20,000 annually in income and job benefits compared to what they would have earned as an employee. That’s far higher than workers in lower-wage industries such as janitorial services or retail, where losses are closer to $6,000 to $8,000, and on par with other high-impact sectors like trucking.
Brian Turmail, vice president of association and industry image for The Associated General Contractors of America, stressed that proper worker classification is critical to maintaining fair competition across the industry.
Correctly classifying workers requires accounting for payroll taxes, workers’ compensation, overtime and other compliance obligations — costs that not all firms take on, he said. At the same time, Turmail said that independent contractors can play a legitimate role when used appropriately.
“When used and applied correctly, they can play an important role in construction, particularly on short-term or highly specialized projects,” he said.
However, he added that the key challenge is distinguishing those arrangements from situations where workers are effectively tied to a single employer.
“That’s why we have advocated for clear, consistent rules, making it easier for contractors to make good faith decisions about classification,” Turmail said. “Contractors should also regularly review how workers are engaged and managed on jobsites.”
Further exposure for contractors
A misclassified worker who gets injured may try to prove their misclassification to gain back benefits. For contractors, that creates additional risk exposure.
Disputes over classification can lead to audits, fines, back wages and potential legal action. In an industry already facing labor shortages and tight margins, those liabilities can quickly become significant.
Mast pointed to potential solutions, some of which are particularly relevant to nonresidential construction. One approach involves leveraging public procurement processes to enforce stronger labor standards.
“Project labor agreements can increase bidding competition, lower the cost to taxpayers, and ensure high-quality, skilled labor on construction projects,” Mast said. “Such measures aim to level the playing field by ensuring that all bidders adhere to the same labor standards, reducing the incentive to cut costs through misclassification.”
