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Dec
2013
19

Triple Jeopardy: Oregon Misclassification Study Highlights Three-Headed Threat of “Independent Contractor” Status

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A new report from the Oregon Center for Public Policy, “Employee Misclassification Harms All Oregonians,” examines the frequency and impact of workers being incorrectly labeled “independent contractors.”  The findings are not surprising, in keeping with the triple jeopardy scenario we’ve highlighted here many a time.  The misclassification of employees has a ripple effect through the economy that harms all involved: the workers that are misclassified, businesses that are correctly classifying their workers, and taxpayers who foot the bill for bad actors.

The OCPP describes this triple jeopardy phenomenon in their report brief:

Workers suffer. Independent contractors lack certain protections afforded by law: unemployment insurance, workers’ compensation insurance, minimum and prevailing wages, overtime pay, health and safety protections, family and medical leave, the federal right to act collectively to improve working conditions, and employment civil rights. Thus, employees wrongly treated as independent contractors have a harder time claiming rights and benefits that come with a job. When wrongly classified as independent contractors, misclassified employees assume full responsibility for Social Security and Medicare taxes, rather than the employer paying half. Finally, the misclassified employee can’t access benefits that the employer may provide other employees, such as health insurance.

Honest businesses suffer. By skirting their legal obligations, cheating employers undercut law-abiding competitors. ICN estimates that for every $100 in payroll costs, Oregon employers who misclassify employees save nearly $5 in state unemployment insurance, workers’ compensation insurance premiums and transit taxes. But there is more. Looking at national data, the Internal Revenue Service calculates that misclassification saves an employer, on average, about $3,700 in employment taxes (Social Security, Medicare and federal unemployment) on a worker earning about $43,000 a year. This puts honest employers at a competitive disadvantage in paying their employees properly.

All Oregonians suffer. The state of Oregon loses revenue when employers misclassify their employees. As noted above, misclassification undermines collection of unemployment insurance, workers’ compensation and transit taxes. In addition, the state loses income tax revenue — nearly all of which goes to fund schools, public safety and programs that protect the vulnerable. ICN explains that there are too many variables to allow an accurate estimate of how much the state loses in income tax revenue as a result of misclassification. It’s clear, though, that in various ways misclassification harms all Oregonians.

Read the full report and browse our misclassification category for examples of and background on this economic epidemic.

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