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Misclassifying Workers in Colorado
Updated On: Jun 162, 2016

Colorado Loses Millions Each Year to Businesses Misclassifying Workers

Colorado is losing more and more money each year to employers dodging mandatory unemployment insurance premium payments, according to a Rocky Mountain PBS News analysis. The estimated loss is about $23 million dollars a year since 2011.

Employers are required to pay the premiums on their employees. But, by labeling workers “independent contractors” – or unsupervised workers who make their own schedule and are not directed in their responsibilities – companies don’t have to pay.

The problem occurs when an employee is directed and supervised, but labeled an independent contractor anyway.

Rocky Mountain PBS analyzed data on random audits conducted by the Division of Unemployment Insurance of the Colorado Department of Labor and Employment and used statistical methods to estimate the rate of misclassification and unpaid premiums to the state as a whole. The results were validated by two statisticians who are officers of the Colorado-Wyoming chapter of the American Statistical Association.

The state lost an estimated $114 million to $124 million since 2011 and the rate of misclassified workers has more than doubled, from at least 6 percent of the work force to at least 13 percent, according to the analysis. The average amount of unpaid premiums has also nearly doubled from at least $69 to $124 per employee annually.

Ron Lundquist of Denver-based paint and drywall company Heggem-Lundquist said there is not a level playing field in the construction industry because of the prevalence of contractors skirting the law.

Joe Mahoney/Rocky Mountain PBS News

Ron Lundquist of Denver-based paint and drywall company Heggem-Lundquist said there is not a level playing field in the construction industry because of the prevalence of contractors skirting the law.

The money at stake would funnel into the state’s unemployment trust fund to temporarily support laid-off Coloradans. During the Great Recession that pool of money became insolvent and required an infusion of money from the federal Department of Labor, according to a report by the Colorado Department of Labor and Employment.

Colorado’s economy is growing. The number of private employers increased 14 percent from 2011 to 2015. As the state’s labor force grows, the analysis suggests the state stands to lose even more money, threatening Colorado’s ability to help unemployed workers in the future.

The Department of Labor and Employment has never fined a company for skirting the laws by misclassifying employees, even though a 2009 Colorado statute allows the unemployment insurance program to assess fines of up to $5,000 for the first offense and up to $25,000 thereafter.

Most misclassification violations are mistakes resulting from lack of understanding of complicated labor laws rather than “willful disregard,” the necessary element to issue a fine, unemployment insurance director Jeff Fitzgerald said.

“What we traditionally find based upon our experience in the field is that it is due to common misunderstanding,” he said. “There's far fewer ‘bad actors’ than one might think.”

Still, the department recognizes a growing trend. Fitzgerald said growing misclassification is due to a booming state economy and more employers and employees opting for gig work – not a lack of enforcement power.

“I don’t think we need more power,” he said. “I think more compliance assistance and education is what's going to solve this problem.”

Along with unemployment insurance premiums, employers must pay state and federal payroll taxes (which are not captured by the analysis). Work by independent contractors is different. Employers are not required to pay the smorgasborg of taxes and insurance coverage on someone who uses their own tools, sets their own hours and directs and oversees their own work independently of the employer, that is, an independent contractor.

The construction industry had the highest unpaid insurance premiums and largest number of misclassified workers from 2011 to 2015, according to the analysis of state unemployment insurance audit data. Between 2011 and 2015, random audits of construction companies in Colorado found $1 million dollars in unpaid premiums and 3,433 misclassified workers.

The practice of misclassifying employees not only deprives the state of money, business owners say, it also creates a competitive disadvantage for law-abiding companies and leaves workers at risk for being cheated out of what they’re owed, too.

“There is not a level playing field in our industry,” Ron Lundquist of Denver-based paint and drywall company Heggem-Lundquist said. Lundquist said his business follows the law on classifying employees and withholding payroll taxes.

“We are at a disadvantage and we cannot be as competitive."


Monday: Part 2. Labyrinth of subcontractors make record tracking difficult.

How we did the analysis: Rocky Mountain PBS News analyzed data from the Colorado Department of Labor and Employment to find the estimated number of workers who were misclassified as contractors instead of employees, based on the proportion of workers in random audits who were found to be misclassified. RMPBS then used the “confidence interval for a single population mean” to estimate the amount per worker of unpaid unemployment insurance.

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