Misclassified Workers Are Costing Legitimate Contractors Bids, Report Finds
According to Construction Dive, a new report from the Economic Policy Institute (EPI) has put construction at the center of the worker misclassification problem, arguing that the practice doesn’t just hurt workers financially — it warps the entire bidding process and puts compliant subcontractors at a structural disadvantage.
The report, from the Washington, D.C.-based nonprofit think tank focused on economic justice, singles out construction for both the scale of misclassification and the size of its financial impact. For field service companies and subcontractors trying to win work the right way, the findings are a direct challenge to how the industry competes.
Background
Worker misclassification, treating employees as independent contractors to avoid payroll obligations, is a cross-industry problem. But according to EPI policy analyst and report co-author Nina Mast, construction feels the effects more sharply than most sectors.
“Construction has the highest median annual earnings of the occupations we are comparing, so that can explain why the dollar amounts they ‘lose’ from misclassification are higher,” Mast told Construction Dive.
Because construction wages are higher than in many other industries, the losses tied to misclassification are proportionally larger. EPI estimates that misclassified construction workers lose roughly $20,000 annually in income and job benefits compared to what they would have received as properly classified employees. That figure dwarfs the losses seen in lower-wage industries such as janitorial services or retail, where EPI puts comparable losses at $6,000 to $8,000. Construction’s impact is described as on par with other high-impact sectors like trucking.
Those losses come in the form of unpaid overtime, missing benefits, and employer contributions that never get made to workers’ comp, unemployment insurance, and payroll tax systems.
Analysis
The financial harm to workers is serious, but for subcontractors trying to compete for commercial and institutional work, the bidding distortion Mast describes may be the more immediate threat.
When a contractor misclassifies workers, they shed a substantial portion of their labor cost burden. Payroll taxes don’t get paid. Workers’ compensation premiums don’t get paid. Benefits aren’t provided. The result is a company that can submit a lower bid, not because they’re more efficient or better managed, but because they’re offloading costs illegally onto their workers and the public systems that backstop them.
As Mast put it directly: “When employers illegally misclassify their workers, they are able to substantially reduce their labor costs, which gives these unscrupulous employers an unfair advantage over law-abiding businesses. This behavior by unscrupulous firms puts pressure on law-abiding firms to break the law in order to lower their labor costs, leading to a race to the bottom on labor standards, which is where the construction industry finds itself.”
That framing, a race to the bottom, is important. It describes a market dynamic that legitimate subcontractors know well but rarely see named this clearly in policy research. When the lowest bid consistently wins and the lowest bid is often the least compliant one, the incentive structure punishes companies doing it right.
This matters especially in nonresidential construction, where projects are often bid competitively and general contractors or project owners may not be scrutinizing the labor compliance practices of every subcontractor in the chain. A misclassifying concrete sub or electrical contractor can undercut a fully compliant competitor by a meaningful margin, not because of operational excellence, but because of illegal cost suppression.
The downstream effects extend beyond individual bid losses. If misclassification becomes normalized in a market, compliant firms either lose volume, reduce margins, or face pressure to cut corners themselves. None of those outcomes are good for the industry’s long-term workforce development, safety culture, or ability to recruit and retain skilled tradespeople.
It’s also worth noting the regulatory exposure for general contractors and project owners who may not be paying close attention. Depending on jurisdiction and contract structure, liability for misclassification can travel up the chain.
What It Means for Subcontractors
- Your compliant cost structure is a competitive liability in a market with widespread misclassification. When you’re bidding against firms that don’t pay workers’ comp or payroll taxes properly, the gap isn’t skill or efficiency — it’s illegal cost avoidance on their end.
- Document your compliance. If you’re properly classifying workers and paying all required contributions, be ready to demonstrate that to GCs and project owners, particularly on public or federally funded work where scrutiny is higher.
- Understand what’s in your supply chain. If you’re a GC or prime contractor, your lower-tier subs’ misclassification practices can create liability and reputational risk that lands on you.
- Support enforcement. Industry associations and trade groups that push for stronger misclassification enforcement are effectively fighting for a level playing field. That’s a direct business interest, not just a policy position.
- Watch for regulatory movement. Reports from organizations like EPI often inform policy changes at the state and federal level. Increased enforcement actions, joint-employer rules, or stricter worker classification tests could change the compliance landscape quickly.
