The “Contract Worker” Scam

8915156747_71d29de1d9_oWhen is a worker an employee rather than a contractor? The line between them is not always clear cut and lends itself to abuse, especially of illegal alien workers. By treating the worker as a contractor, the employer not only eliminates the costs of payroll taxes and unemployment insurance, but also sidesteps the legal liability for hiring aliens illegally in the country.

As the illegal alien population rapidly grew over the past few decades, the scam proliferated. Not only has it facilitated the hiring of illegal aliens as well as evasion of laws regulating minimum wages and tax liability, it also has created pressure on competitors to adopt the same practice or be driven out of business.

There is a cost to this scam both to the exploited workers and to local, state and federal governments. Virginia has created a task force to reduce the illegal use of the contractor designation for employees, focusing especially on car wash and cleaning companies. The Washington Post reports August 30 that state officials estimate there are as many as 214,000 workers improperly classified as independent contractors in the state. Maurice Jones, the state’s Secretary of Commerce and Trade stated that, “It impacts state revenue and it’s no small amount of money.” According to Mark Lara, of the U.S. Department of Labor, whose jurisdiction includes Northern Virginia, “We see that [misuse of the contractor provision]in the restaurant industry, we see that in agriculture, and it looks like now we’re seeing that in the automobile industry.”

FAIR estimated the 2010 costs to all levels of government as well as taxes collected from illegal aliens. This “contract worker” scam, however, is an additional hidden cost that we did not try to estimate except as a factor that lowers the estimated tax collection received from the illegal alien workers.

About Author


Jack, who joined FAIR’s National Board of Advisors in 2017, is a retired U.S. diplomat with consular experience. He has testified before the U.S. Congress, U.S. Civil Rights Commission, and U.S. Commission on Immigration Reform and has authored studies of immigration issues. His national and international print, TV, and talk radio experience is extensive (including in Spanish).


  1. avatar

    Contractors lack a lot of the legal protections of regular employees, such as the right to unionize.

  2. avatar

    The abuse of the term contractor has been going on for quite some time. After Bush 1 got into office all the money had been spent by Reagan on defense. So Patrick Moynihan fine lad that he was, came up with a way to fleece independent contractors and collect additional taxes by forcing them to become employees of contracting companies. There was the infamous 25 rules that the IRS used to judge whether you were an employee or a contractor. Basically everyone ends up as an employee except for lawyers, doctors, dentists….

    A lot of contractors had incorporated under sub-chapter “S”. This was a good initiative of President Reagan to spur entrepreneurial growth. After congress passed the Moyihan/IRS initiatives companies no longer wanted to use independent 1099 workers because they feared the IRS. So the 1099 independent became an “employee” of a shell company where people who did nothing could fleece an additional 25% to 50% profit from every hour worked by the captive contractor. The immediate impact was the rates of contractors increased because of the overhead of the companies they now were forced to work for. In many cases the independents net profit from their labor decreased because to remain competitive their hourly rate dropped so the company could still have their 25%-50% profit margin. So these rules helped destroy the competitive advantage of independent contractors had over job shops and contracting companies. Eventually the companies using the services of the contracting companies moaned about the cost of labor and encouraged Congress to import cheap foreign labor in the form of H-1B, L-1 visas and a massive increase in the issuance of green cards.

    Every problem that I have mentioned was initiated by Congress because to get reelected you need to spread around a little cash back home. America should also be thinking hard about term limits for the Senate and House and eliminate the need for pork-barrel spending to get reelected.