Misclassifying workers takes money from all Washingtonians

Washington State’s laws are clear. There are real differences between an employee and an independent contractor. But too many employers misclassify workers as contractors when state law says they must be employees.

A new Harvard Law School report suggests the savings do not just come from exploited contractors. It also comes at the expense of Washington’s honest businesses, employees and taxpayers.

Tens of thousands of workers misclassified every year

The researchers at the law school’s Labor and Worklife Program looked at the five years from 2013 to 2017 and found that the state’s overall rate of worker misclassification was at least 1.3% and probably more. Washington has a total workforce of nearly 3,369,000, meaning the state has at least 44,500 misclassified workers on average each year.

Misclassifying saves money, but whose money?

The primary savings from the employer’s point of view is avoiding having to pay into federal and state taxes and required insurance premiums, which are essentially pooled resources for all workers and companies.

According to the study, due to the misclassification of workers as independent contractors during the study period:

  • Washington lost $152 million in unemployment insurance taxes.
  • Washington lost $268 million in workers’ compensation insurance premiums.
  • The U.S. lost nearly $300 million in federal Social Security and Medicare payroll taxes.
  • The U.S. lost $9 million in federal unemployment insurance taxes.

All these savings from violating the law in Washington state add up for those willing to risk the legal consequences. According to the Labor and Worklife Program report, misclassification of workers can yield savings in labor costs of up to 30%.

The “gig economy” has both virtues and vices

Independent contractors have a valuable place in the state’s economy, as do businesses that use their services lawfully.

But between 2008 and 2017, the percentage of Washington employers that use misclassification almost tripled. The massive and illegal savings from misclassification have helped bring about the rise of the so-called gig economy in Washington State.

Construction workers, clerical workers and those in hospitality (hotels and restaurants) are the workers most commonly misclassified. The heaviest density of this illegal practice is in the metro regions of the state’s northwestern counties.