Misclassification of employees as independent contractors, commonly referred to as payroll fraud, is a very disturbing and growing trend in the construction business.
In a competitive business like construction, where the low bidder is normally awarded the work on a project, misclassification of workers can provide a contractor a huge bidding advantage. This illegal business practice to lower costs gives them an unfair opportunity to get more work at the expense of legitimate contractors that follow the laws, building permit regulations and IRS rules for employees.
But this is not just a contractor problem. It is costing federal, state and local governments huge sums of money through the loss of payroll taxes.
This business model appears very prevalent and growing. Just a few years ago we were not aware of this issue, but last year in LaPorte, it was pretty well documented that misclassification of employees or payroll fraud was occurring on several projects. In the past, we had no suspicion of this type of illegal business practice, but now we are hearing more and more of it taking place.
I have been trying to figure out why a business would want to do this, because it is clearly illegal.
I would hate to see this business allowed to continue and have to face the reality someday that our firm would be forced to adopt this business model to survive and get work by classifying our employees as independent contractors instead of employees.
I did a little investigating how such a practice may affect our business and was surprised what I found. Maybe this will help put this in perspective.
If we were to follow the business model of payroll fraud, here is what I discovered:
We would not withhold or pay Social Security, Medicare and Federal unemployment taxes, which totaled nearly $800,000 last year.
We would not withhold or pay nearly $200,000 in Indiana state unemployment taxes.
We would not withhold or pay employee withholding taxes to the federal government for $1.4 million; the state of Indiana for $332,000; and local cities and county for $112,000.
With the use of independent contractors instead of employees, we would not pay $2.9 million for employee pension and 401k retirement plans to provide employees a secure retirement and not become burdens on state and federal governments later.
Health care costs would become their responsibility if they were not employees, saving us another $1.9 million. We would not pay workers compensation insurance on employees, a $164,000 savings.
For just my firm of 100 contractors, the total loss to federal, state and local governments would be $2.84 million.
The loss to employees for retirement plans, health care, etc., would be $5 million.
Profit to the unscrupulous businessman would be in the millions of dollars.
The reward for this business model, as you can see, is huge. The risk appears to be minimal as there does not appear to be any investigation or enforcement to stop this illegal business practice of misclassifying employees as independent contractors.
I am sure there are many businessmen out there asking themselves, why not? This could be very profitable, with little risk.
We need to make sure action is taken to stop this illegal business practice from stealing from government, Hoosier workers and legitimate, law-abiding businesses before it really does become the standard of business in the Indiana construction industry.