Study: One in 10 Wisconsin construction workers misclassified

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About one in 10 Wisconsin construction workers are improperly classified as independent contractors or paid in cash, abuses that deprive the state of about $40 million worth of tax revenue every year.

That’s according to study results released Thursday by the Midwest Economic Policy Institute. The group used its report to try to gauge the prevalence in Wisconsin, Illinois and Minnesota of a form of employment abuse often called worker misclassification.

In the three states studied, according to the institute, misclassification results in the loss of about $362 million worth of tax revenue a year. Employers who misclassify direct employees as independent contractors are often able to get away with paying them in cash and avoiding paying for workers compensation, unemployment insurance or payroll taxes.

Wisconsin state officials have long recognized the problem. A task force specially appointed by Gov. Tony Evers has released its own set of recommendations for rooting misclassification, which is often believed rampant in the construction industry.

“Wage theft—including worker misclassification and payroll fraud—hurts workers, puts law-abiding businesses at a competitive disadvantage, and shortchanges taxpayers,” said Nathaniel Goodell, the principal investigator for the report. “While prior research has shown that between 12% and 21% of construction workers face these abuses, it is alarming to see the Upper Midwest’s construction industry at the high end of that scale.”

There is some good news for the Wisconsin construction industry. The Midwest Economic Policy Institute’s report finds that misclassification is less prevalent in this state than in either Minnesota or Illinois. According to the institute, 14,519 construction workers were misclassified or paid in cash in Wisconsin in 2018 – about 10% of the people working in the industry.  The comparable figure for Minnesota was about 23% and that for Illinois was 20%.

The rate of misclassification in Wisconsin cost the state about $40 million in lost property tax revenue in 2018. Misclassified construction workers in Wisconsin also earned 31% less — or nearly $30,000 — than workers who were properly classified.

The report offers two explanations for why misclassification may be more common in Illinois and Minnesota. First, Illinois and Minnesota each have a bigger population of foreign-born workers — a group that tends to be more susceptible than natives to worker misclassification.

Another consideration is Wisconsin’s lack of prevailing-wage requirements for state and local projects. Without state prevailing-wage laws, which have been repealed in Wisconsin in the past decade, construction workers here often earn less than their counterparts in Illinois or Minnesota, which still require prevailing wages on many public projects, according to the report.

“Unscrupulous contractors in the underground economy have an even greater competitive advantage over law-abiding contractors in states where wages are higher, because they avoid paying higher social insurance taxes,” according to the report. “Nevertheless, despite lower rates of misclassification and illegal employment, payroll fraud and wage theft remain major problems in Wisconsin.”

In compiling its study, the Midwest Economic Policy Institute organization compared payroll data submitted in all three states with household surveys tracking the number of workers who report themselves as being employed in construction. Instances of likely misclassification were revealed when differences appeared between the number of workers who say they are employed by a contractor and the number of employees companies report. The study also cites previous research suggesting that the share of construction workers that are misclassified ranges from 13% to 22%.

The report recommends three ways for states to improve their enforcement of wage-theft laws. First, it calls for hiring more unemployment-insurance auditors — especially people who are bilingual. Second, it says states should impose large fines and prevent contractors found guilty of wage theft or misclassification from bidding on public contracts.

Lastly, the report calls on Wisconsin and Illinois to follow Minnesota’s lead in designating wage theft a criminal offense punishable by as many as 20 years in prison and as much as $100,000 in fines.

“We’re in support of these recommendations to help curb misclassification,” said Jake Castanza, executive director of the Wisconsin Building Trades Council. “As we know, wage theft treats workers with a lack of dignity, and we need to work to restore those ideals. We also need to find relief for our taxpayers. We’re leaving millions of dollars on the table because we are allowing fraudulent labor brokers to exploit our laws.”

As for Wisconsin’s misclassification task force, its recommendations range from increasing fines and hiring staff to enforce current law to starting a contractor-registration system and having government agencies share more data.

Wisconsin’s task force also found misclassification is costing the state tens of millions annually in lost tax revenue. According to its estimates, the losses have tripled in the past 20 years, going from $17 million in 2000 to $57 million in 2019. Between 2013 and 2019, 40% of the unemployment-insurance audits conducted on construction employers in Wisconsin turned up at least one incident of worker misclassification.

John Schulze, director of legal and government affairs for the Associated Builders and Contractors of Wisconsin, said the state appears to be in a good position to fight misclassification thanks to the work of its task force.

“Wisconsin appears to be ahead of the curve because it incorporated several of the studies recommendations way back in 2009,” Schulze said. “Since then, both Wisconsin Republican and Democrat administrations have hammered the bad actors across all industries with fines and penalties and back wages and taxes.” Follow @natebeck9