Construction worker misclassification costs the state millions of dollars yearly and puts workers at risk.
Anthony Abrantes, assistant executive secretary-treasurer, Eastern Atlantic State Regional Council of Carpenters, said worker misclassification exploits workers and their safety, creates an unfair playing field for legitimate employers, and costs taxpayers money.
Abrantes, whose union covers Pennsylvania, explained that worker misclassification is when a contractor classifies an employee as an independent contractor when they are not.
“This amounts to tax fraud and unscrupulous activity,” he said.
Workforce and economy
Christopher Hallock Deputy Secretary, Bureau of Safety and Labor-Management Relations Department of Labor & Industry, in written testimony before the state House of Representatives, said misclassification is a significant issue affecting Pennsylvania’s workforce and economy.
“A misclassified worker is denied essentially all workplace protections, most of which apply only to workers who are employees,” Hallock said. “When an employer misclassifies a worker as an independent contractor, they wrongly prevent that worker from accessing minimum wage or overtime, protection from discrimination, family and medical leave, the right to organize, workers’ compensation, unemployment compensation, and more.”
In 2023, L&I’s Bureau of Labor Law Compliance conducted 249 Act 72 investigations, finding 712 misclassified workers. In the first five months of 2024, the bureau has investigated 121 entities and found that these companies misclassified 356 construction industry employees.
Unscrupulous companies
According to Abrantes, while most contractors are legitimate, the problem comes from mostly illegitimate companies that often work with, or are created by, foreign cartels to hire documented or undocumented workers, mostly from South America.
“There is a huge criminal element to this,” he said. “A cartel will bring workers into the country, form an LLC to work for a general contractor. The LLC will pay workers in cash with no tax deductions. By doing so, they launder money.”
At the end of the year, Abrantes said the LLC will give the workers a 1099, making them responsible for all taxes owed throughout the year.
“These workers know nothing about this and don’t have the money to pay those taxes,” he said.
Abrantes said the union put undercover carpenters on a site in Virginia to get video footage of illicit activity.
A video Abrantes shared showed workers receiving paychecks in an undisclosed building and then immediately handing the checks to another person in exchange for cash.
Abrantes said the transaction amounted to under the table payments with no taxes deducted.
The workers do make money, Abrantes said. While they only make around $50 per week in their native country, they can make about $1,000 a week here.
“The contractors often transport them here and pay to house them,” he said. “It creates an ecosystem within the same criminal element with a revolving door.”
The Century Foundation, a progressive think tank and research group that pursues equity in education, health care and work agreed.
In a published report, the foundation said a substantial portion of the construction workforce now operates in the underground economy, with many employers hiring them through cash-only, off-the-books employment relationships that cast aside any pretense of the formality (or documentation) of traditional independent contracting.
This process of misclassification and off-the-books payments is aided by the presence of “labor brokers,” who are effectively unregistered middlemen capable of recruiting and employing legions of construction workers on a jobsite on short notice and who operate in the world of cash payments and check-cashing services, the foundation said.
Taxes
“Misclassification improperly saddles the worker with the responsibility for paying the full payroll tax contribution to Social Security and Medicare, a portion of which ought to be paid by an employer,” Hallock said.
“More than being just a worker issue, the proper classification of employees is about fairness in business competition,” he added. “When employers misclassify workers, law-abiding businesses suffer because they are forced to compete in the marketplace on unequal terms against unscrupulous employers that are avoiding payroll tax contributions, unemployment compensation taxes, workers’ compensation insurance premiums, or paying overtime.”
Hallock said communities also suffer by not receiving the full amount of tax revenue they are owed, meaning parks, schools, and police and fire
departments are all negatively impacted by misclassification, in addition to additional strain being placed on the health care system.
In addition to the construction industry, Hallock said a survey of state and federal studies by the National Employment Law Project found high rates of misclassification among workers in the janitorial, home care, real estate, tech, local delivery, and trucking industries.
Injury
Often, when these workers are injured on the job, Abrantes said the employer just drops them, leaving them to seek health care wherever they can.
“If they make a mistake on the job, it falls on them to fix it on their dime,” he added.
“According to the Bureau of Workers’ Compensation, since 2023 approximately 300 misclassified employees were injured, resulting in $450,000 in lost compensation,” Hallock said. “Moreover, the impact of worker misclassification directly impacts the Uninsured Employers’ Guaranty Fund (UEGF).”
Hallock explained that an employee injured while performing their duties for an uninsured employer may file a petition against the UEGF.
“If the petition is granted by a Workers’ Compensation Judge, the UEGF is then secondarily liable for payment of compensation and medical bills if the employer fails to pay. This puts the Fund in the position of having to make up the difference for employers who wrongly fail to obtain or provide workers’ compensation to misclassified workers and increases costs for compliant businesses,” he said.
L&I’s Center for Workforce Information and Analysis (CWIA) estimates that 15% of Pennsylvania employers misclassify their employees, which equates to approximately 185,000 workers being misclassified.
Based on these projections, misclassification costs the UC Trust Fund approximately $52 million per year, Hallock said.
Gov. Josh Shapiro has urged the General Assembly to pass his proposed 2024-25 budget that invests $1.2 million in L&I's Bureau of Labor Law Compliance, which enforces 13 Pennsylvania labor laws. L&I would use those funds to hire an additional 12 labor law compliance investigators, bringing the bureau's complement to 39 investigators responsible for enforcing labor laws across the state.
"To be blunt, we need more resources to combat worker misclassification in Pennsylvania. With just 70% of Pennsylvania's population, New Jersey has 70 labor law investigators and plans to add 10 more," L&I Secretary Nancy Walker said in a statement. "This is an issue that affects every Pennsylvanian in one way or another, and the Shapiro Administration is fully committed to bringing the bad actors into compliance but we need boots on the ground to do it."
The Office of Unemployment Compensation Tax Services (OUCTS) said it routinely performs unemployment compensation tax audits on all Pennsylvania businesses.
In 2021, OUCTS found 104 construction employers had misclassified 1,250 employees as independent contractors, representing $26,076,434.82 in underreported wages.
L&I gave a regional breakdown of Act 72 worker misclassification cases filed in 2021 is as follows: Altoona District Office, 8 cases; Harrisburg District Office, 30 cases; Philadelphia District Office, 19 cases; Pittsburgh District Office, 10 cases; and Scranton District Office, 21cases.
Abrantes said the real numbers are probably much higher based on what the union sees, estimating that 20% of the workforce is misclassified.
“These criminal enterprises help workers get identification, tax identification numbers and Visas,” he said.
Abrantes said the developer who hires the general contractor is not liable for what companies they hire do.
“If they were held liable, they would be more likely to hire reputable companies,” he said. “It would change the culture, so we are educating them about this and their reputation.”
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