Executive Order number 20 from Wisconsin’s Governor Tony Evers will likely result in increased costs for construction projects.
The executive order is designed to find contractors who misclassify employees as independent contractors. According to the order, in 2009 (why they used 2009 as the benchmark year is strange, and appears to be misleading), the Department of Workforce Development found 44% of the workers investigated during employer audits had been misclassified as independent contractors.
Moving forward, it appears the department conducted almost 2000 investigations from January 2016 to April 2019, and of those investigations, 422 resulted in audits (lucky employers). From the 422 audits, the Department found 5,841 workers misclassified, along with under-reported gross wages of almost $70 million, and assessed approximately $1.8 million in unemployment insurance taxes, interest, and penalties.
What does the order do? It creates a Joint Enforcement Task Force on Payroll Fraud and Worker Misclassification, according to the language of the order.
What impact will it have? I predict several impacts, and depending on your point of view, some you may consider positive, and some you may consider negative. First, I anticipate the costs of residential roofing to increase. From as best I can tell, many smaller roofing contractors use “independent contractors” to perform the physical work, and many of them are likely misclassified and under Wisconsin law should be classified as employees.
With workers’ compensation cost of around 33% of the wages paid, one can easily imagine adding workers’ comp cost to labor will create upward price pressure, albeit that’s not all.
Unemployment insurance, and matching FICA come into play as well as other costs when a given person is classified as an employee versus an independent contractor.
The next impact will be a reduction in wages. Again, this consequence is easy to imagine. For example, if a roofing worker currently classified as an independent contractor is currently making $35 an hour, and then moved to employee status, the contractor may offer $27 for the same work performed to mitigate the increased cost. Hopefully, it’s obvious I’m making the actual numbers up, however, I am basing them on real-world numbers, albeit generalized to illustrate the concept.
Moving along to the original concept, the cost of roofs. For example, let’s say a roof that costs $5000 currently, one would expect the cost to rise to $5500, all else being equal. The reason why all the labor increase in cost (easily the labor cost component rises about 45%) doesn’t equate to a 45% new roof cost increase is labor makes up only one piece of the puzzle. For example, material cost doesn’t change, and the markup may not adjust by a full proportion as contractors feel “squeezed.”
The squeeze will happen from “one-man” bands, including more than one man when operating as a partnership that can avoid some of the above costs. This is already going on as any small roofing company “playing by the rules” already knows the challenge with competing against those that don’t.
Changing people from independent contractors to employees has of course some winners and losers. Some natural, and some unintended.
The winners in the labor change include:
Workers who are seriously injured and find they can no longer work, or would have massive medical or disability bills. That’s what workers’ compensation insurance is for, and for those who collect who otherwise wouldn’t, this will be clearly a big win.
The insurance industry. Insurance carriers and agents (including myself) win because more insurance will be sold. If you like the idea of helping the insurance industry, you like this move by the governor.
Companies using employees that directly compete with other companies that classify workers and independent contractors. I imagine their current frustration of losing bids and contracts because others are able to underbid them, creating an unlevel playing field that may become at least a little more level.
The state government. When income taxes are automatically taken out, and less deductions are available (think home office and many others including travel to job sites) the state makes more money.
State workers. More enforcement means more state workers enforcing. Those in that line of work may find greater opportunity to enter the line of work, as well as those already working for the state receiving promotions. Plus someone has to hire, take care of HR, and operate the pensions.
Payroll services providers. Running payroll is complicated and an increase in employees versus independent contractors means more money spent on software and accounting.
The losers in the change in status include:
Workers who don’t get hurt. They’ll see a reduction in pay to cover the cost of workers’ compensation (there’s no free lunch and someone has to pay for the medical and disability costs. Workers who don’t get hurt will bear the largest portion of this cost – which comes with the benefit of being able to collect if they need to). As well as less tax deductions. As an employee versus a self-employed contractor, there aren’t as many tax deductions and strategies available.
Contractors who have labor once independent contractors and now employees. They should expect to absorb some of the costs as they won’t be able to fully mitigate the increased costs through price increases and reduction in worker pay. I imagine some contractors, especially those just hanging on by a thread having to call it quits.
Those wanting to have work done. Most of the increase in cost of doing business will get passed on to those who purchase the services. Plus, consumers of the contracted services are likely to find fewer competitors bidding on any given project for reasons I spell out in others parts of this post.
I imagine where you fall in your opinion is largely dictated by your status in the change. It’s hard to argue that what the executive order really does is simply enforce the law as it stands. Wisconsin was the first state in the country to establish workers’ compensation.
What’s my take and opinion? It would be disingenuous for me to say anything other than I anticipate selling more insurance if the executive order becomes more than lip service by the governor. As someone who’s family and extended family works in the trades, I love working with contractors, so the idea of placing more coverage and working with more contractors sounds very appealing.
The free-market believer in me also thinks people should be free to choose how they want to contract with others without having the government dictate the terms. As a result, I’m conflicted. I know Texas doesn’t require workers’ compensation like Wisconsin does, and that state appears to be doing well, however, I haven’t studied the issue to know the issue in full from a compare and contrast point of view. In the end, it doesn’t matter because the law on workers’ compensation in Wisconsin is what it is, and everyone should be equal and operate on a level playing field. Those that don’t like the law should take the time and the effort to effect change if that’s appropriate.