Misclassification Costs Workers, Social Insurance

As many as 10–30% of employers misclassify workers at an enormous cost to both workers and social insurance systems.

New analysis from the National Employment Law Project, focusing on state-level reports on employee misclassification, estimates that social insurance systems can lose up to 30% of per-worker revenue when workers are misclassified as independent contractors, as independent contractors make no contributions to unemployment insurance and workers’ compensation systems.

Independent contractors in the occupations analyzed in the report also typically earn less than they would as employees, and this lower pay translates directly into lower contributions to Social Security.

For workers, misclassification can strip minimum wage and overtime protections, workers’ rights, and eligibility for unemployment insurance or workers’ compensation, employer-provided health insurance and retirement benefits. Misclassification also shifts the full burden of social insurance costs—including Social Security and Medicare—to workers.

For example, a typical construction worker misclassified as an independent contractor would lose as much as $20,399 in annual income and job benefits compared with what they would have earned as an employee.

The issue disproportionately impacts people of color, women, and immigrants, who are more likely to be in occupations where misclassification is common, such as construction workers, truck drivers, janitors and housekeeping roles, home health and personal care aides, retail sales workers, and landscaping and groundskeeping workers.

Given the high stakes of misclassification for workers’ access to fundamental rights and protections, embedding strong legal definitions in state and federal law is fundamental to ensuring that employees are not improperly classified as independent contractors. In 2025 and 2026, lawmakers in at least 12 states proposed or passed legislation to address worker misclassification. Most recent state efforts have focused on increasing accountability of employers that misclassify workers, bolstering remedies for workers subject to illegal misclassification, and strengthening enforcement capacity.