New York Gov. Eliot Spitzer has charged the Department of Labor with leading a Joint Enforcement Task Force that is investigating the state's runaway problem of employee misclassification. That announcement, made earlier this month and reported in The New York Times, referenced a study by Cornell ILR researchers, "The Cost of Worker Misclassification in New York State."

An estimated 700,000 workers, or 10.3 percent, of the state's private-sector workforce are intentionally or mistakenly misclassified as independent contractors instead of as employees, according to the study. Employers who misclassify these workers do not pay into state unemployment insurance and Workers' Compensation nor do they withhold taxes for income, Social Security and Medicare. As a result, the state's unemployment insurance fund alone loses approximately $176 million each year -- a fact that is prompting reviews by both state and federal policy-makers.

The study, conducted by Linda Donahue and Fred Kotler, both ILR senior extension associates, and James Ryan Lamare, ILR Ph.D. candidate, was released earlier this year and reported in The New York Times in June. The full report is available online at http://digitalcommons.ilr.cornell.edu/briefs/28/.

"We thought this would be an issue that would be of interest to the governor especially with his history as state attorney general," said Kotler. "There were efforts to address the problem under the Pataki administration in the 1990s, but earlier recommendations were never taken up. This looks like a wholly different effort with the potential for some serious outcomes that, hopefully, will lead to concrete enforcement and agency action."

Workers mislabeled as independent contractors do not receive the statutory protections afforded "employees," such as the right to unionize, be paid minimum wages and overtime, and be included in employee benefit plans. One of the biggest sectors for abuse is in the construction industry, but the violations also exist in health care, retail sales, transportation, and hotel and restaurant sectors as well, Kotler said.

The study found that approximately 39,500 employers misclassify workers each year, according to figures from state agency audits.

However, not all employers intentionally misclassify workers. According to the study, the state's definition of independent contractor is confusing: There are clear guidelines for some, but not all, occupations. The governor's task force also will look into the need for clarifying those guidelines.

Kotler said the problem has grown in the last 10 years due to lack of regulatory enforcement coupled with unbridled competition across labor sectors.

"Overall, enforcement will tend to level the playing field for workers and employers," said Kotler. "There are unscrupulous business owners who are taking terrible advantage of employees. Intentional misclassification gives them an unfair competitive advantage over law-abiding employers. Both business and government have a direct interest in vigorous enforcement. Unemployment insurance and workers compensation funds are significantly short-changed as are state and federal tax revenues."

The task force will be required to submit a report to the governor on Feb. 1 of each year detailing its actions and recommending potential legislative or regulatory changes.