What Will It Cost You to Be an Independent Contractor?
You might read that employers want to cut costs when they use independent contractors, not employees. But they’re not cut. They’re shifted to the person working. In addition to losing the protections of labor and employment laws, gig workers who should be employees lose thousands of dollars each year.
Earlier this year, the Economic Policy Institute (EPI) ran the numbers and came up with cost estimates that independent contractors bear when they’re misclassified. They looked at 11 commonly misclassified types of jobs and how much workers lose annually:
- Construction workers
- Truck drivers
- Janitors and cleaners
- Home health and personal care workers
- Retail sales workers
- Housekeeping cleaners
- Landscaping workers
- Customer service reps/call center reps
- Security guards
- Light truck delivery drivers
- Manicurists and pedicurists
They looked at median earnings and the value of benefits, then took a range of pay as to what they may earn as independent contractors, and then determined a low and high estimate of the costs. Of these types of workers, the lowest estimated annual loss would be $4,558 for a manicurist and pedicurist, to a high estimate of an $18,053 loss for a truck driver.
The National Employment Law Project, in a 2020 report, cited other studies that show a construction worker making $31,200 a year before taxes would have an annual net compensation of $10,660.80 if they’re an independent contractor but $21,885.20 if they’re an employee. A study of port truck drivers found that yearly median net earnings prior to taxes for contractors were $28,783 but $35,000 for employees.
More Than a Legal Distinction, It’s Lost Income and Higher Costs
A typical construction worker, for example, earned $48,210 in 2021. This includes supplemental pay (shift differentials, vacation, overtime, sick pay, and other paid time off). When employer contributions to health insurance, unemployment insurance, workers’ compensation, Medicare, Social Security, Medicare, and retirement plans are considered, the total value for an employee increases to $52,398 annually.
The same person, doing the same job but classified as an independent contractor, loses a lot. This includes lost access to legal protections, unemployment insurance, and workers’ compensation benefits. EPI estimates the value of that job for an independent contractor falls to between $35,670 and $42,221, based on several assumptions. Misclassification results in a loss of $10,177 to $16,729 per year.
How Common is Misclassification?
The share of employers in Washington state misclassifying their workforce increased from 5.0% in the 2008 fiscal year to 14.4% in the 2017 fiscal year. It averaged 16% over 2013-17, according to a Harvard Law School Labor and Worklife Program report. In 2010, Virginia estimated about 40,000 employers misclassified their employees.
Who Else Misses Out When Employers Misclassify Workers?
Federal, state, and local governments that count on employee income-based taxes are shortchanged by employers misclassifying their workforce, according to the AFL-CIO:
- The federal Government Accountability Office estimates employer misclassification cost the federal government $2.72 billion in 2006. Almost 60% was due to workers not paying income taxes, and the rest is due to employers not paying taxes to support Social Security, Medicare, and unemployment insurance
- A study commissioned by the federal Department of Labor estimates misclassification caused nearly $200 million in lost unemployment insurance tax revenues annually through the 1990s. Also, because of misclassification, about 80,000 workers missed out on benefits each year.
- Pennsylvania estimates unemployment insurance revenue is shorted about $200 million yearly by misclassifying employers. New York projects their annual revenue loss to be $198 million, with Massachusetts having a yearly loss of $35 million
Employers misclassifying their workforce by not paying market wages and required taxes and fees can undercut law-abiding competition. Their labor costs may be up to 40% lower. Legitimate employers are underbid, lose business, wage rates decrease, and lawful employers subsidize the freeloaders by paying higher health insurance and workers’ compensation premiums.
Contact a Tustin Employment Law Lawyer
If you believe your employer misclassifies you as an independent contractor, talk to an experienced employment law attorney at MJB Law Group. We will explain your legal rights, assess your case’s strength, and fight for your future. Call us today at (949) 266-0880 or fill out our confidential contact form so you can discuss your options at a FREE case evaluation and consultation.
Michael J. Berry is the founder and principal attorney of MJB Law Group. His complete focus within the legal field revolves around litigation, as he solely champions the causes of employees whose labor rights have been transgressed, as well as regular individuals who have suffered an injury due to another person’s carelessness. Mr. Berry is Board Member for the Orange County Trial Lawyers Association and also a member of the California Employment Lawyers Association, Consumer Attorneys Association of Los Angeles, and Consumer Attorneys of California. Learn more about Michael here.