22. Self-Employment in Construction and Other Industries
In 2015, 2.4 million construction workers were self-employed (see Glossary), of which 1.6 million (67%) were unincorporated (see Glossary).1 The proportion of unincorporated self-employed workers in construction has been consistently higher than that among all nonfarm industries combined since 1995 (chart 22a). Within construction, the proportion of unincorporated self-employed workers fluctuated with the economic cycles, dipping to 15.7% in 2007, jumping to 19.0% in 2010, and then falling back to 16.3% in 2015. These results are in line with previous findings that self-employment expands during economic downturns due to limited wage-and-salary employment over the course of a recession.2
Self-employment varies by occupation. In 2015, 37% of construction managers were self-employed, a higher share than in any other construction occupation (chart 22b). The proportion of incorporated (see Glossary) self-employment in this occupation was also higher than average for the industry; about 45% of self-employed construction workers were incorporated. The proportion of self-employment was above the industry average among carpet and tile workers (35.7%), carpenters (35.1%), and painters (35.1%) as well, but most self-employed workers in these occupations were unincorporated.
Unincorporated self-employed workers are also known as independent contractors or individual proprietorships (see Glossary); they are the only owner of the business, pay taxes as personal income, and are within the nonemployer category defined by the U.S. Census Bureau (see page 3). Based on the Census data, the number of individual proprietorships jumped by almost 28% from 1.90 million in 2002 to 2.43 million in 2007, fell to 2.12 million in 2012 (the lowest in almost a decade), and then increased to 2.22 million by 2014 (chart 22c). This indicates that the ease of entry into self-employment (e.g., firms with individual proprietorships or nonemployers in construction typically need less capital to start, see page 8) may contribute to business cycle dynamics, particularly during economic recoveries.2
In some cases, employers may intentionally misclassify wage-and-salary employees as independent contractors to avoid paying Social Security, workers’ compensation, employee benefits, and other taxes.3 Worker misclassification in construction tends to be more common than in other industries. This may be explained by a combination of factors such as higher workers’ compensation insurance premiums, mobility of employers and the workforce, the temporary nature of the work, and the multiple layers of contractors and subcontractors.4
There is a strong economic incentive for employers to misclassify; it has been estimated that in the construction industry alone, employers can save 25% in labor costs through misclassification.5 Many states have estimated the economic effects of misclassification.4 Studies in Maine, Massachusetts, Minnesota, and New York have estimated that 15% to 20% of construction employers misclassified their employees during the study period, and one Virginia study estimated that proportion to be 30%.6 One in-depth analysis by the McClatchy news group found over a third of construction workers in North Carolina and Texas to be misclassified.7 While these estimates may not be comparable due to differing methods among states, the perception is that these studies are likely underestimations.6
The misclassification of employees as independent contractors incurs a high cost on the government due to unpaid taxes, and on workers in the form of denied protections, insurance, and other compensations.6,7 Furthermore, underpayment of unemployment, workers’ compensation, and Social Security contributions harms the viability of those funds and the competitive position of employers who do not misclassify their workers.6,7 In light of this, misclassification can be considered a serious problem not only for workers and the government, but for the entire economy. In response to this dilemma, the U.S. Department of Labor (DOL) has worked with the IRS and many states to combat employee misclassification and to ensure that workers receive the wages, benefits, and protections to which they are entitled.3 Between 2010 and 2016, 35 states passed legislation preventing worker misclassification and increasing penalties for violations (chart 22d). In Fiscal Year 2015, the DOL Wage and Hour Division (WHD) investigations resulted in more than $74 million in back wages for more than 102,000 workers in all industries.3
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Individual proprietorship – Referred to as a “sole proprietorship,” or an unincorporated business with a sole owner. Also included in this category are self-employed persons.
Self-employed – From the Current Population Survey (CPS): CPS subdivides the employed by “class of worker”—that is, wage-and-salary employees, the self-employed (incorporated and unincorporated), and unpaid family workers. “Self-employment” in this chart book includes both incorporated and unincorporated. However, “self-employed” in the U.S. Bureau of Labor Statistics’ publications generally refers to unincorporated self-employed, while the incorporated self-employed are counted as “wage-and-salary” workers. More information is available at https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/pdf/self-employment-in-the-united-states.pdf (Accessed January 2017).
Unincorporated self-employment – Refers to people who work for themselves, such as independent contractors, independent consultants, and freelance workers. Most often they do not have paid employees (or nonemployer, see page 3).
1. Self-employment data are collected monthly as part of the Current Population Survey (CPS) by the U.S. Bureau of Labor Statistics (BLS; see page 10). Calculations by the CPWR Data Center.
2. Shapiro AF. 2014. Self-employment and business cycle persistence: Does the composition of employment matter for economic recoveries? https://www.frbatlanta.org/~/media/Documents/research/seminars/2014/finkelstein-030314.pdf (Accessed January 2017).
3. U.S. Department of Labor. 2016. The DOL misclassification initiative. https://www.dol.gov/whd/workers/misclassification/ (Accessed January 2017).
4. Chicago Regional Council of Carpenters. 2016. Size and cost of payroll fraud: Survey of national and state studies. https://www.carpentersunion.org/news/size-and-cost-payroll-fraud-survey-national-and-state-studies (Accessed January 2017).
5. Leyh C. 2015. Getting a fair shake: Reducing the perils of worker misclassification on federally funded construction projects. Public Contract Law Journal 44(2): 307-325.
6. National Employment Law Project. 2015. Independent contractor misclassification imposes huge costs on workers and federal and state treasuries. http://www.nelp.org/content/uploads/Independent-Contractor-Costs.pdf (Accessed January 2017).
7. The McClatchy Company. 2014. Contract to cheat. http://media.mcclatchydc.com/static/features/Contract-to-cheat/?brand=nao (Accessed January 2017).
Chart 22b – Due to statistical sample sizes, estimates vary ± 5%, except for power-line installer, insulation, and sheet metal, for which the estimates may vary ± 10%. See page 11 for occupational classifications.
Chart 22c – Individual proprietorship data are available from 2002 onward.
Chart 22d – The 35 states that signed memoranda of understanding are: Alabama, Alaska, Arkansas, California, Colorado, Connecticut, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Mexico, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, and Wyoming.
Chart 22a – U.S. Bureau of Labor Statistics. 2015 and previous years Current Population Survey. Calculations by the CPWR Data Center.
Chart 22b – U.S. Bureau of Labor Statistics. 2015 Current Population Survey. Calculations by the CPWR Data Center.
Chart 22c – U.S. Census Bureau. 2014 and previous years Nonemployer Statistics. https://www.census.gov/programs-surveys/nonemployer-statistics.html (Accessed June 2016).
Chart 22d – U.S. Department of Labor. 2016. The DOL misclassification initiative. http://www.dol.gov/whd/workers/misclassification/ (Accessed January 2017).
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