It was recently estimated that the state of Colorado is losing significant amounts of money each year from employers dodging mandatory unemployment insurance premium payments. The loss was estimated by a Rocky Mountain PBS News analysis at about $23 million dollars a year since 2011.

The problem surfaces when workers are misclassified as independent contractors, who don’t receive unemployment coverage, versus an employee of the company. Employers are required to pay the premiums on their employees. But, by labeling workers as “independent contractors” companies can avoid paying.

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. They found the state lost an estimated $114 million to $124 million since 2011 and the rate of misclassified workers has more than doubled, from 6 percent of the work force to at least 13 percent, according to the analysis.

A National Estimate

As the leading Independent Contractor Compliance and Engagement solution provider in the US, we are often asked by enterprise clients and prospects to quantify the risk of worker misclassification.

This case study of unemployment funding losses from worker misclassification in Colorado provides a nice illustration of how large this issue is in the United States. When measuring GDP, the State of Colorado ranked #18 in 2015, with $318,600,000,000 GDP, or 1.7% of total US GDP (which was $18,558,000,000,000).

Using GDP as our proxy, if we extrapolate the $23 million estimated annual loss in Colorado for unemployment funding to a national estimate it would come to $1.35 billion per year.

And that’s just for unemployment. Don’t forget that employers also have worker compensation, federal and state payroll tax, wage and hour, FMLA, EEOC, and Obamacare costs, to name a few. (None of these costs were captured by this analysis.)

Independent Contractor Misclassification

Work done by independent contractors is different. Employers are not required to pay the many different taxes and insurance coverages on workers who are essentially in business for themselves. Workers who use their own tools, sets their own hours, and direct and oversee their own work independently of the employer, are independent contractors.

When you roll up the issue across all the local, state, and federal agencies that care about independent contractor misclassification the financial ramifications become huge. It becomes very apparent why so many agencies are aggressively investigating companies suspected of misclassifying workers as independent contractors rather than employees.

In addition to paying back taxes owed, there can also be significant fines and penalties. For example, the Colorado Department of Labor and Employment can fine companies for misclassifying employees. 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.

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

Most agencies, like those in Colorado, find that misclassification violations are often mistakes resulting from lack of understanding of complicated labor laws rather than willful disregard. Fortunately, for companies that want to engage independent talent there are experts, like TalentWave, that can validate proper worker classification and also engage these valuable flexible workers in a safe, easy, and effective manner.