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Good Jobs and a Level Playing Field in the Next Recovery

Jared Bernstein, Chief Economic Advisor to the Vice President, a growing problem in our labor market: the misclassification of employees as independent contractors (ICs).

As the American economy moves from recession to recovery, our administration must continue to do all we can to create the conditions for robust job growth.  What’s more, we need to be mindful not only of the quantity of new jobs, but of their quality as well.

That’s why we’ve proposed to address a growing problem in our labor market: the misclassification of employees as independent contractors (ICs).   Deputy Secretary of Labor Seth Harris testified to Congress on this issue today, and the opening of his testimony is worth repeating here:

"Misclassification" seems to suggest a technical violation or a paperwork error.  But “worker misclassification” actually describes workers being illegally deprived of labor and employment law protections, as well as public benefits programs like unemployment insurance and workers’ compensation because such programs generally apply only to “employees” rather than workers in general…Misclassification is no mere technical violation.  It is a serious threat to workers and the fair application of the laws Congress has enacted to assure workers have good, safe jobs.

While unintentional misclassification occurs, that’s not the real problem.  Some workers really are independent contractors, and sometimes employers mistakenly classify some of their employees as ICs.  But some less scrupulous employers have been intentionally and systematically misclassifying their workers, and it’s these cases that need to be met with new rules to address what experts say is an increasing problem.  And those new rules are precisely what we at the Middle Class Task Force have proposed.

You may be wondering why an employer would misclassify their workers.  The answer is simple: they can pay them considerably less, since ICs are not subject to minimum wage or overtime rules.  And since employers don’t have to pay the requisite employment taxes on ICs, like payroll or unemployment insurance taxes, they end up shortchanging government coffers as well.

A moment’s thought also shows how misclassification creates and uneven playing field: employers who systematically misclassify their workers have a significant competitive advantage over the vast majority of employers who are playing by the rules.  And if the folks breaking the rules can do the job more cheaply than the folks following the rules, it’s going to be tougher and tougher for the good guys to hang on.

President Obama’s FY2011 Budget features a plan to address the problem.  First, we need to get rid of some of the old policies that incentivize misclassification, then we need to make it easier for both the Labor and Treasury Departments to find misclassifiers, get them to accurately classify their workers in the future, and penalize them if they fail to do so.  Finally, we must restore workplace protections to workers who have been wrongly classified.

And there’s another good reason to pursue these changes today: in these times of high deficits, we need the revenue.  Remember, when employers misclassify employees as ICs, they don’t pay the taxes they owe.  Implementing the changes we’ve proposed will bring in $7 billion over ten years.

So keep an eye on this issue as we work with Congress to not only create more jobs, but to create better ones.

Jared Bernstein is Chief Economic Advisor to the Vice President