Why Is Misclassification A Problem?

According to the Virginia Department of Labor and Industry’s June 2, 2015 Policy Memorandum, misclassification of employees as independent contractors is harmful for three major reasons.

First, Misclassification is a form of payroll fraud that deprives the Commonwealth of millions of dollars in tax revenues. The costs to Virginias’ taxpayers, employers and employees are in the tens, if not hundreds, of millions of dollars.

Second, misclassified workers suffer. Employees misclassified as independent contractors are denied legal protections and benefits, including workers’ compensation, medical and family leave, unemployment insurance, minimum wage protections, overtime, health insurance, retirement benefits, and occupational safety and health protections.

Third, Misclassification hurts competition and undermines employers who properly classify workers by giving an unfair advantage to employers who misclassify their workers.

According to VOSH’s 2015 Employee Misclassification brochure, employers who misclassify fail to purchase workers’ compensation insurance, pay unemployment insurance and payroll taxes, or comply with minimum wage and overtime laws, resulting in a forty percent reduction in costs. This places those employers at a competitive advantage in the bidding process for new projects. Additionally, employers who properly classify workers may be liable for additional unemployment tax and workers’ compensation rates, which are adjusted upwards to cover costs avoided by misclassification of workers.