Misclassification is a form of wage theft that occurs when companies misidentify workers as independent contractors, even though they act as employees of the company, often in order for the employer to avoid paying the worker benefits, overtime, taxes, and insurance.
The report estimates that approximately 10% of private sector workers were misclassified in 2019 in Minnesota, meaning they were victims of payroll fraud. These workers lost between $2.9 billion and $6.2 billion of pay and benefits like paid leave, overtime pay, health insurance, and retirement benefits, the report found.
Not only are the misclassified workers themselves losing out, the state of Minnesota is losing an estimated $506 million and $1.3 billion in tax revenue, the report finds. This includes losses due to unrealized state income tax collections, lost workers compensation premiums, and lost unemployment insurance contributions—leaving law-abiding companies and taxpayers to fill in the gaps.
Aaron Rosenthal is the author of the report and research director for North Star Policy Action, a pro-worker research organization. He explains that small business owners that follow the rules are undercut by the companies that commit payroll fraud. “When employers engage in that kind of fraud, they can reduce their labor costs substantially, and that allows them to undercut employers who are otherwise following the rules around wages and employment.”
Rosenthal argues that all taxpayers are harmed by this widespread practice. “Everyone else throughout the state has to fill that void, and so ultimately, we all become responsible for paying a greater share of our income in taxes to make up for the lost revenue that’s coming through payroll fraud,” he says.
The report finds that the industries in Minnesota with the highest rates of payroll fraud are agriculture and real estate. Minnesota’s non-union construction workers also face high levels of misclassification and wage theft, with an estimated 23% of non-union construction workers reportedly to be misclassified, resulting in an estimated $30,000 annual loss in overtime pay, health insurance, and other benefits,according to a report published by the Midwest Economic Policy Institute in 2021.
Misclassified workers are also cheated out of workers compensation insurance, leaving workers scrambling after a workplace injury, which can cause delays in medical care and leave workers with massive medical bills without the help of insurance.
In July, a new Minnesota law went into effect making it easier for workers to report misclassification. The legislation, supported by local Minnesota construction unions and worker advocate organizations, will increase enforcement of misclassification prohibitions, increase penalties for repeat offenders, and provide workers with a pathway to recoup their lost wages and benefits in court.
Rosenthal says that while the new legislation is a good step forward, more research with more comprehensive data must be done in order to better protect workers from misclassification and payroll fraud. Due to previous siloing of data amongst state agencies, misclassification has gone under-researched and lacks sufficient data to truly capture the scale and harm to workers and taxpayers alike.
He also stresses that the numbers in the report are conservative in their estimation due to the nature of the fraud being hidden and the lack of access to state and federal data collected. “These estimates are the floor in terms of the scale and cost,” Rosenthal warns. “We ultimately believe that payroll fraud is likely a much bigger problem than what our findings suggest.”
>> The article above was written by Isabela Escalona, and is re-posted from the excellent Workday Magazine, that we highly recommend!
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