ID and Tax: A Practical Fix for the Growing Problem of Worker Misclassification

We are running out of workers. Declining birth rates and a lack of vocational training in schools have contributed to a labor shortage that is rapidly becoming a crisis. President Trump has endorsed apprenticeship opportunities and designated major funding to restore and improve vocational training in high schools and colleges. These are bold efforts, but they will take years to affect the labor shortage we face today.

Unfortunately, many employers of key American industries have chosen a cheaper alternative to the employer/employee relationship that made this nation one of the most productive in the world. A change in the IRS Code in the 1970s allowed employers to pay workers as independent subcontractors, or self-employed if they met certain criteria.

Today, workers in almost any occupation can declare themselves self-employed. They also have the opportunity to pay into the social security system and be eligible for benefits upon retirement. But many independent contractors choose not to do so.

Several governmental agencies were created to monitor the wage/hour system. The IRS is responsible for determining who qualifies as a self-employed individual in lieu of an employee, also called W-2. Wage and Hour monitors minimum wage issues as well as overtime. And individual states are responsible for unemployment insurance. These three have rarely worked together in a coordinated manner to address the hourly versus self-employed issue.

All this sounded like a good plan for the workers. But the debate over who is truly self -employed and who is actually an employee, has opened the door for not only abuses, but the potential end of our social security system that has been the lifeline for retired workers for almost a century.

In 1935, President Franklin Roosevelt signed the Social Security Act. It created retirement benefits and has been an incredible lifeline for millions of Americans in the ensuing decades. In 1965, the Medicare and Medicaid Act added to the social safety net for workers and retirees and built on the strength of the employer/employee relationship that served as the bedrock of the American economy for the latter half of the 20^th century.

Each employee would have 7.65 percent of their pretax wages deducted from their check, and employers would match that payment, for a total of 15.30 percent. This added billions of dollars to the system and helped secure retirement and medical benefits for millions of workers. It was their reward for a lifetime of labor.

But today, 30 percent of American workers — or perhaps many more since that figure is based on a 25-year-old government survey — may be misclassified as self-employed.  Many of them don’t pay taxes and won’t receive Social Security or Medicare benefits. If they haven’t saved enough on their own, they may have to rely on family or charity to survive in their later years.

And the bottom-line is that they and their ‘employers’ are not contributing to the social security fund. One million workers added to a W-2 payroll will generate over $5 billion annually to social security, increasing fiscal revenues without raising taxes on law abiding US businesses and citizens. If more workers elect to be called self-employed, our social security will be more at risk in a few short years.

Many employers misclassify workers when they file workers as independent contractors who should actually be filed as employees. They do this in order to avoid the costs of paying their share of employment taxes and to avoid providing workers compensation, health insurance, and training. This shifts risks and tax obligations to the worker.

Employers may also obtain their workers from subcontractors of subcontractors to avoid liability for hiring unauthorized immigrants, who are used as subcontracted independent contractors due to their lack of employment authorization. Misclassification is often used to exploit unauthorized immigrant workers because they have limited bargaining power and no legal employment authorization. It allows employers to avoid I-9 employment elegibility verification forms, and it provides employers plausible deniability for hiring workers who lack employment eligibility. 

Worker misclassification consequentially results in lost tax revenue and the depression of wages and standards as it allows companies who take adavantage of this system to undercut and underbid employers who treat workers as employees, pay their fair share of taxes, and provide training and benefits.

In the construction industry, for example, there are less and less employee to employer relationships, workers don’t get the safety training that employees do. Construction job sites can be dangerous. When workers without proper safety training and workers compensation get injured, taxpayers end up paying the hospital bill.

Lack of skills training associated with worker misclassification also has a detrimental impact. Somebody who is trained to do a specific function does it better. A big problem in construction is doing it twice. So many people, when they’re not trained, make a mistake and it has to be redone. It’s estimated 20-25% of construction projects have to be redone because people don’t have the proper skills training.

Most young people today want jobs that offer a career or at least the promise of some payoff at the end of years of skilled labor. They will only consider jobs that offer no training, workplace protections or benefits, if they have no choice.

This is the dilemma of our workforce shortage. It’s young people who lack education or legal immigration status who fill these jobs out of necessity. But without employers to train them, they will never receive the skills that they need to do the job well — or safely. And without the insurance protections of full-time employees, they will be dependent on society for their care upon retirement.

It’s long past time that we address the issue. To fix the problem we need to hold ourselves and our elected officials accountable. First, we need to eliminate misclassification by creating tamper-proof identification for long-time undocumented immigrants who can pass a background check and agree to work for employers who deduct and match taxes for Social Security and Medicare. Not a path to citizenship or right to vote, just an ID that would allow them to legally work as employees for tax paying employers.

Second, we can ask the Trump Administration or Congress to clarify the hourly versus self-employed issue.  With our ‘gig’ economy offering jobs that require no payroll taxes, who will fund our social security and medicare?  Our governmental agencies need to offer clear guidelines to determine who is really self-employed, and if workers are self-employed, they should be required to contribute to social security and medicare.

After these solutions are in place, the government should increase enforcement of worker classification, payroll, and tax laws.

ID and Tax is a simple solution to a complex problem, one that encourages the values of hard work and employers and employees working for a common goal. These are American ideals that built the greatest economy in the world.

In the past decade, we have chosen to ignore those ideals in favor of political gamesmanship. The immigration crisis has dovetailed with the workforce crisis. We can’t address one without the other. With the border now secure, it’s time we fixed both. Our nation’s future depends on it.