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INDUSTRY EXPANSION AND EMPLOYEE MISCLASSIFICATION

ASHLIE CARLSON ASHLIE CARLSON is a graduate of the University of North Carolina at Chapel Hill and a contributing editor of
Construction Accounting & Taxation. She can be contacted at jcat@technicaeditorial.com.

The big picture for construction still looks healthy - builder confidence is blossoming, construction spending is
climbing, and entrepreneurs are seeing great success for their small businesses in construction-related fields, helping
to propel the industry forward. This issue of "Construction Material" touches on the prosperity of small businesses in
the construction market and the most recently available housing start and permit numbers, as well as examines the
relationship between heightened construction spending and the ongoing labor shortage concerns confronting
construction employers. It also explores the process by which employers should determine whether their workers are
employees or independent contractors, an issue that the U.S. Department of Labor (DOL) has been working for years
to address.

Small business expansion


A recent analysis conducted by Sageworks, a firm that specializes in the financial analysis of privately held
companies, has identified the top 10 fastest-growing industries in small business. The analysis looked at the financial
statements of companies with less than $5 million in annual revenue and determined the level of growth from May
2014 to May 2015. The average growth rate across all industries was 8.5 percent, but half of the top-10 sectors with
growth surpassing the average were related to construction. 1
Foundation, structure, and building exterior contractors; other specialty trade contractors; utility system construction;
residential building construction; and building equipment contractors all posted at least 12 percent growth in the
12-month period leading up to May 2015. Chuck Nwokocha, an analyst with Sageworks, even partially attributed the
growth of small businesses within other industries to the recently flourishing construction trades. 2
The largest growth for construction small businesses was reported by foundation, structure, and building exterior
contractors, whose total sales rose by 19.4 percent since May 2014. Also included in Sageworks' top-10 list of
businesses were general freight and specialized freight trucking outfits and machinery, equipment, and supplies
merchant wholesalers. 3

Spending and labor trends


May saw continued improvement for the construction industry, with numbers from the Associated General
Contractors (AGC) of America reflecting spending at its highest levels since October 2008. On a seasonally adjusted
basis, construction spending in May reached $1.036 trillion, which was 0.8 percent greater than the revised figure for
April 2015 and 8.2 percent greater than the spending total in May 2014. 4
Heightened spending in all three sectors - private residential, private nonresidential, and public - contributed to the
overall impressive total. While gains from April 2015 to May 2015 for each category remained below 1 percent,
nonresidential spending jumped 10.3 percent from its May 2014 levels. Residential spending growth was slightly less
robust at 7.8 percent, and public spending rose a mere 2.8 percent, likely lagging as a result of federal budget
tightening. Taking a closer look, the most dramatic yearly spending increases can be traced to the following sectors:

manufacturing construction (70 percent);

amusement and recreation construction (46 percent);

lodging construction (30 percent);

private office construction (26 percent); and

multifamily construction (21 percent). 5

While these spikes are great news for the sectors at the moment, AGC of America warns that these sectors could also
be hit the hardest by the looming labor shortages facing the construction industry. "It would be a sad irony," said CEO
Stephen E. Sandherr in a press release, "if firms can't take advantage of growing demand for work because there aren't
enough workers." 6 Typically, such powerful surges in spending would also lead to increased hiring, and while
employment in construction has risen 4.2 percent in the past year, the number of workers employed in the field did not
change between May and June of this year. Employment and hiring appear to be leveling off even while demand for
construction services is increasing. AGC of America Chief Economist Ken Simonson also sees evidence of the labor
shortage in the average weekly hours for craft workers and similarly skilled nonsupervisory employees. In June, they
worked more on average than they've worked since the statistic was first recorded in 1947, according to AGC of
America: 39.9 hours per week. 7
AGC of America has been concerned with potential labor shortages since the industry upswing began, but they are not
alone in recognizing the potential ramifications. The U.S. Bureau of Labor Statistics has predicted that the industry as
a whole will be short 1.6 million workers by the end of seven years. 8 Management consultant, investment banking,
and people development services provider FMI recently released its second quarterly report for 2015, which
recognizes the labor shortages as a hurdle for badly needed infrastructure projects that are already being put off. 9 The

National Association of Home Builders (NAHB) has also conducted in-depth research regarding the labor shortages to
identify just which areas of the industry are being most affected. Their 2015 survey of single-family home builders
reveals that carpentry, particularly rough carpentry, is one of the skills home builders are having a hard time finding in
new employees, with 69 percent of survey respondents reporting at least some difficulty. More than 50 percent of
respondents also had trouble hiring bricklayers/masons and framing crews. 10 Interestingly, the builders surveyed were
even more troubled by a lack of subcontractors available to perform certain tasks than the lack of qualified employees.
A previous study by NAHB concluded that three-quarters of the work that goes into completing single-family housing
projects are completed by subcontractors, so the strain companies feel in securing them could dampen growth. Rough
carpentry skills among subcontractors was still cited as the most notable shortage, with 74 percent of respondents
confirming it as a concern, but at least some shortage was reported in every specialty from painting (50 percent) to
roofing (43 percent) to electricity (48 percent). Across the board, reports of shortages were more prominent in the
2015 survey than in 2014, but the NAHB did point out that, in some regions, builders still reported ample labor
availability. 11

Misclassification of employees
The Wage and Hour Division (WHD) of the U.S. DOL issued a memo in early July reminding businesses to be wary of
misclassifying employees as independent contractors. While some employees are mistakenly recorded under the
independent contractor label, others might be intentionally misclassified to save the employer tax money. Dr. David
Weil, author of the document, said that the DOL continues to receive complaints from misclassified workers, who may
not receive the same protection and benefits as direct employees (minimum wage, overtime pay, etc.) if they are
reported as contractors. 12
The memo from the WHD stressed that there is no simple way to determine whether an employee should be classified
as an independent contractor. The DOL relies on a six-item "economic realities" test to make that determination, and
they expect employers to use those same factors in their decisions. The six points are presented in the following list.
1. If the work performed by the hire is an integral part of the business, he or she is more likely an employee than
an independent contractor.
2. If the hire's management skills affect his or her own opportunities and profits, he or she may be an independent
contractor.

3. Hires who have invested in a job at a level similar to the employer may be considered independent contractors.
However, the memo points out that small investments, such as the purchase of equipment, may not qualify as an
investment that is "significant in nature and magnitude relative to the employer's investment in its overall
business." 13
4. If the hire's job is specialized, as is true of many independent contractors, but does not demand business
decision-making and initiative, he or she is more likely to be an employee. Independent contractors often market
their own services and can rely on their own discretion in deciding which jobs to take, which suppliers to work
with, and so on.
5. If the hire is working exclusively and permanently with one employer, he or she is most likely an employee,
whereas a temporary relationship in which the hire is also working for others usually indicates that the person is
an independent contractor.
6. The greater the levels of control by the employer and financial dependence of the hire on the employer, the
more likely it is that he or she is an employee rather than a contractor. 14

While it is difficult to accurately measure the damage caused by employee misclassification, estimates by the DOL in
2000 reflected that nearly 30 percent of all audited firms had misclassified employees, which prompted the agency
into action. The lower costs of labor enjoyed by companies that misclassify their employees creates an imbalance in
the market, and costs state and federal governments significant sums of tax revenue. 15 In 2006, the federal government
is believed to have missed out on $2.72 billion in income, Social Security, and unemployment taxes as a result of
misclassifications, according to a Government Accountability Office analysis. 16 Construction is but one of the many
industries that could be contributing to the problem, but it was held up as an example in the recent outline by Weil.
Recent efforts by the DOL to crack down on employee misclassification include heftier fines for the offense,
increasing the number of investigators in the department, and establishing memorandums of understanding (MOUs)
with individual state governments. Since the beginning of the initiative, the DOL has successfully established an
MOU with 23 states, and the collaborations are yielding results. In 2014, more than 109,000 workers were granted a
total of $79 million in back wages after investigations by the WHD revealed they'd been misclassified. The states that
have joined the DOL's effort are Alabama, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa,
Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Rhode
Island, Texas Utah, Washington, Wisconsin, and Wyoming. 17

Housing starts and permits


Construction spending, materials pricing, and construction put-in-place are all useful measures for tracking current
industry growth, but keeping a close eye on building permits helps to gauge the path the industry will take in the
future. In May this year, the number of building permits for home construction in the U.S. defied earlier predictions
and rose 11.8 percent to a level not seen since mid-2007. Actual housing starts dropped, which was anticipated, but the
level remained above one million units and still represents vast improvement from years past. 18
Building permits issued in May for single-family homes rose 2.6 percent, and multifamily home permits spiked 24.9
percent. According to Reuters, permits for multi-unit buildings haven't been in such high demand since January 1990,
but the recent numbers are consistent with the trend away from home-purchasing. By region, housing permit
distribution reflected remarkable growth in the Northeast, reaching levels that haven't been exceeded since 1987.
Growth in the Midwest, although not quite as drastic, stayed strong, while the South and West issued fewer permits in
May than they did in April 2015. Groundbreaking fell across the country, most noticeably in the Northeast and least
noticeably in the South. Reuters reports that, after a June survey, builders seem to be more optimistic than they've been
in nine months. 19

Biery, M.E., The 10 fastest-growing industries in small business, Forbes (June 16, 2015). Available at:

http://www.forbes.com/sites/sageworks/2015/06/14/the-10-fastest-growing-industries-in-small-business/.
2

Ibid.

Op. cit. note 1.

Construction spending in May reaches highest level since 2008 as all major segments advance for month and year:

Potential worker shortages loom (press release), AGC of America (July 1, 2015). Available at:
https://www.agc.org/news/2015/07/01/construction-spending-may-reaches-highest-level-2008-all-major-segments-a
dvance#sthash.zw7vaVN4.dpuf.
5

Ibid.

Op. cit. note 4.

Construction unemployment falls to lowest June level since 2001 while employment ties six-year high; officials

warn of growing worker shortage (press release), AGC of America (July 2, 2015). Available at:
https://www.agc.org/news/2015/07/02/construction-unemployment-falls-lowest-june-level-2001-while-employmentties-six#sthash.K9cQDMJw.dpuf.
8

O'Malley, S., 10 ways construction companies can outsmart the labor shortage, Construction Dive (Feb 26, 2015).

Available at:
http://www.constructiondive.com/news/10-ways-construction-companies-can-outsmart-the-labor-shortage/368659/.
9

2015 FMI's Construction Outlook: Second Quarter Report, FMI Corporation (2015). Available at:

http://www.fminet.com/media/pdf/forecasts/Outlook_2015Q2_FINAL.pdf.
10

Emrath, P., For builders, labor/subcontractor shortage intensifies, Eye on Housing (July 3, 2015). Available at:

http://eyeonhousing.org/2015/07/for-builders-laborsubcontractor-shortage-intensifies/.
11

Ibid.

12

O'Malley, S., Status update: 6 DOL guidelines for independent contractor classification, Construction Dive (July

21, 2015). Available at:


tp://www.constructiondive.com/news/status-update-6-dol-guidelines-for-independent-contractor-classification/4025
72.
13

Ibid.

14

Op. cit.note 12.

15

"Misclassification of Employees as Independent Contractors: Fact Sheet 2014," Department for Professional

Employees, AFL-CIO (Oct 2014). Available at:


http://dpeaflcio.org/programs-publications/issue-fact-sheets/misclassification-of-employees-as-independent-contract

ors/.
16

"Employee Misclassification," National Conference of State Legislatures (2015). Available at:

http://www.ncsl.org/research/labor-and-employment/employee-misclassification-resources.aspx.
17

"Wage and Hour Division (WHD): Misclassification of Employees as Independent Contractors," United States

Department of Labor (2015). Available at: http://www.dol.gov/whd/workers/misclassification/#stateDetails.


18

Mutikani, L., U.S. building permits near eight-year high; starts pull back, Reuters (June 16, 2015). Available at:

http://www.reuters.com/article/2015/06/16/us-usa-economy-housingstarts-idUSKBN0OW1GD20150616.
19

Ibid.

2015 Thomson Reuters/Tax & Accounting. All Rights Reserved.

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