A new report from the Economic Policy Institute is putting a spotlight on worker misclassification in the construction industry, highlighting its significant financial impact on workers and its role in distorting competition among contractors.
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The Washington, D.C.-based nonprofit found that misclassifying employees as independent contractors can cost workers thousands of dollars annually in lost wages and benefits, while also undermining payroll-based systems that fund programs such as unemployment insurance and workers’ compensation.
While the issue spans multiple sectors, the report identified construction as one of the hardest hit industries due to higher average wages and the scale of the problem.
“Construction has the highest median annual earnings of the occupations we are comparing, so that can explain why the dollar amounts they ‘lose’ from misclassification are higher,” said Nina Mast, a policy analyst at the Economic Policy Institute and co-author of the report.
According to the report, misclassified construction workers lose roughly $20,000 per year in income and job-related benefits compared to properly classified employees. That figure significantly exceeds losses seen in lower-wage industries such as retail or janitorial services, where workers lose between $6,000 and $8,000 annually.
The disparity underscores how higher wages in construction magnify the consequences of misclassification, including unpaid overtime, lack of employer-sponsored benefits and missed tax contributions.
Beyond individual workers, the practice has broader implications for the industry’s economic structure and regulatory systems.
The report also found that misclassification can give certain contractors an unfair cost advantage, allowing them to underbid competitors who comply with labor laws.
“When employers illegally misclassify their workers, they are able to substantially reduce their labor costs, which gives these unscrupulous employers an unfair advantage over law-abiding businesses,” Mast said. “This behavior by unscrupulous firms puts pressure on law-abiding firms to break the law in order to lower their labor costs, leading to a race to the bottom on labor standards, which is where the construction industry finds itself.”
For contractors competing on commercial and institutional projects, this dynamic can skew the bidding process, making it difficult for compliant firms to compete strictly on price while maintaining proper labor practices.
Associated General Contractors of America also weighed in on the issue, emphasizing the importance of correct classification to ensure fair competition.
Brian Turmail, the group’s vice president of public affairs and workforce, noted that proper classification requires employers to account for payroll taxes, workers’ compensation and overtime obligations—costs that may be avoided when workers are misclassified.
“When used and applied correctly, they can play an important role in construction, particularly on short-term or highly specialized projects,” Turmail said, referring to legitimate uses of independent contractors.
However, he added that distinguishing between legitimate contractor relationships and improper classification remains a challenge for many firms.
“That’s why we have advocated for clear, consistent rules, making it easier for contractors to make good faith decisions about classification,” Turmail said. “Contractors should also regularly review how workers are engaged and managed on jobsites.”
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The report also highlights the legal and financial exposure contractors face when misclassification is identified. Injured workers may challenge their classification status to recover benefits, potentially triggering audits, fines and back-pay obligations.
In an industry already grappling with labor shortages and tight margins, these liabilities can create significant operational risks.
Mast pointed to policy solutions such as project labor agreements, which can help standardize labor practices across bidders and reduce incentives to cut costs through misclassification.
“Project labor agreements can increase bidding competition, lower the cost to taxpayers, and ensure high-quality, skilled labor on construction projects,” Mast said.
As scrutiny increases, industry stakeholders say addressing misclassification will be key to ensuring fair competition, protecting workers and maintaining integrity across the construction sector.
Originally reported by Keith Loria in Construction Dive.
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