New study says 1-in-5 construction workers in the Upper Midwest are illegally misclassified as independent contractors or paid off the books

La Grange, IL:  With public budgets increasingly strained by the COVID-19 pandemic, new research by the Illinois Economic Policy Institute (ILEPI) and Midwest Economic Policy Institute (MEPI) shows that nearly one-in-five construction workers in the Upper Midwest states of Wisconsin, Minnesota, and Illinois face some form of wage theft at an annual cost to taxpayers of more than $362 million.

Read the Study, “The Costs of Wage Theft and Payroll Fraud in the Construction Industries of Wisconsin, Minnesota, and Illinois: Impacts on Workers and Taxpayers.”

Wage theft includes a range of illegal practices, from improperly classifying employees as independent contractors and not making required payroll tax, unemployment insurance, and workers compensation contributions to paying workers less than legally required “under the table” (or off the books) in cash.  

“Wage theft—including worker misclassification and payroll fraud—hurts workers, puts law-abiding businesses at a competitive disadvantage, and shortchanges taxpayers,” said Nathaniel Goodell, MEPI’s 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.”

In their report, ILEPI researchers compared household survey data from the U.S. Census Bureau with payroll records submitted to state unemployment insurance programs—finding that of nearly 538,000 Wisconsin, Minnesota, and Illinois construction workers, almost 100,000 were either misclassified as independent contractors or paid off the books in cash.    

Including wages and fringe benefits, ILEPI researchers found that upper Midwest construction workers who are misclassified as independent contractors or paid off the books earn an average of 29%-36% less in total compensation than their properly reported peers—a pay gap ranging from $23,500 per year in Minnesota to nearly $30,000 per year in Wisconsin. This gap does not include the eventual impact on affected workers’ Social Security benefits, which are also directly tied to reported wages.

Because these practices dramatically reduce the amount of money reported through construction payrolls, researchers also analyzed their substantial impact on state taxpayers as a whole. All told, they estimate that construction worker misclassification and off-the-books employment costs Wisconsin, Minnesota, and Illinois a total of $362 million is state income taxes, unemployment insurance contributions, and workers’ compensation premiums every year.   

“The staggering differences in compensation and state tax contributions between properly-reported employees and workers who are misclassified or paid off the books highlights a system that all but incentivizes contractors to flout the law in order to win project bids,” added study co-author and ILEPI Policy Director Frank Manzo IV. “With our region already struggling in the face of the COVID-19 pandemic, it is vital to shine a light onto the extraordinary costs that these illegal practices are imposing—not just on working families and honest businesses—but on every single taxpayer.”

To help the region’s policymakers combat the problem, ILEPI researchers highlighted a growing series of reforms that have been adopted in other states and localities—including strengthening prevailing wage enforcement and unemployment insurance audits, expanding punitive actions to include criminal penalties against employers found to engage in these abuses, and implementing local procurement policies such as certifying compliance with wage and hour laws, enacting responsible bidder ordinances and prequalification surveys, and excluding known violators from being awarded public projects.

For its part, the State of Minnesota enacted a law that includes fines of up to $100,000 and imprisonment of up to 20 years when an employer, with intent to defraud, fails to pay employees all wages required by law or attempts to make it appear that wages paid to employees were greater than actually paid.

“Employee misclassification, payroll fraud, and other forms of wage theft are crimes that cause a multi-billion drain from the pockets of working families, local governments, and state budgets—at a time when our communities can least afford it,” Manzo concluded. “States and localities in other parts of the country are proving that by enacting sensible regulatory, enforcement, and procurement safeguards, we can contain these abuses and make sure that crime doesn’t pay.”

The Illinois Economic Policy Institute (ILEPI) is a nonpartisan, nonprofit organization which uses advanced statistics and the latest forecasting models to promote thoughtful economic growth for businesses and working families.

The Midwest Economic Policy Institute (MEPI) is an associated organization of the Illinois Economic Policy Institute.