Feds, states burned by construction "contractors"

A labor law dodge has cost state and federal tax coffers billions a year, according to McClatchy newspapers. Construction companies in at least 28 states allegedly routinely said employees were contractors to cut costs and use the lower expenses to undercut competitors and win business.

The tactic, called misclassification, is an old problem. Employers have a variety of financial and regulatory responsibilities for employees. Companies are supposed to cover half a worker's FICA payroll tax, pay unemployment tax and worker's comp, and comply with federal and state labor laws, including provisions for overtime. Many businesses, in an effort to cut costs, shift the burdens onto employees by calling them contractors.

Misclassification happens in many industries. For example, an appeals court recently ruled that FedEx Ground drivers were incorrectly treated as contractors between 2000 and 2007.

According to the McClatchy report, however, the problem has become endemic in construction, particularly after the 2009 federal stimulus. Officials allegedly were aware of the problem, but did nothing as no one wanted to rock the boat of the spending package, even as the federal government "hammered private companies doing private work" over the same issue.

The cost to governments has been massive, according to the report. The McClatchy analysis shows $400 million a year in lost tax revenue in Florida alone. The tab was $500 million a year in North Carolina and $1.2 billion in Texas. Tax authorities rely heavily on an employer withholding structure to compel tax payments.

Employees classified as independent contractors are one of the largest areas of collection loss, according to experts CBS MoneyWatch has spoken with, with state revenue departments typically seeing even higher noncompliance than the IRS.

Not only are there tax losses, but employees can be left without a safety net. Employers don't pay so-called contractors the full amount necessary to cover all taxes, worker's comp, health insurance, and other expenses. If they did, they'd still be out all that money and wouldn't be able to undercut competitors' prices.

So workers are left largely in a hole. They often forgo various types of insurance and are also generally expected to provide their own tools. Average construction annual wages are $34,000, according to McClatchy -- a number that has remained flat since 1980. If employers don't increase the pay, the amount is inadequate for workers who have now suddenly become business owners, if they are to meet the full obligations pushed onto them by the companies