Journalists at The McClatchy Company spent a year investigating the widespread practice in the construction industry of misclassifying employees as independent contractors—all to avoid filing payroll taxes, paying unemployment tax, and providing workers’ compensation.

Below are the highlights of the report, which you can read in full here.

Recipients of economic stimulus money avoided taxes

Businesses that received money through the American Recovery and Reinvestment Act of 2009 were required to file weekly payroll records to prove they paid their employees fair wages. Some of them lied on the forms, claiming their employees were independent contractors so they could save the money they would have to spend on taxes. The government apparently did not question the accuracy of the businesses owners who claimed their workers were self-employed contractors and not company employees

Thousands of those misclassified workers were paid off the books and often earned lower-than-acceptable wages. Few of them paid taxes according to IRS rules for the self-employed. Some weren’t paid for all of the hours they worked, while others had to use their own money to buy hard hats and other protective gear. Few had company-provided insurance or workers’ compensation, leaving them on their own to cover their medical bills for on-the-job injuries.

In 2010, a team of Department of Labor investigators inspected 51 stimulus projects for wage violations and collected more than $10 million in back pay owed to 6,500 workers. Over the next three years, the inspectors found wage and hour violations in 62% of its 1,278 investigations.

In most cases, workers interviewed by McClatchy reporters said they accepted their situation rather than speaking up and risking their jobs.

Where misclassification is prevalent

 The rate of misclassification for construction workers in Texas is 37.7%, according to the report. In North Carolina, it’s 35.2%. and in Florida, 15.5% of construction workers are misclassified as self-employed contractors.

Although misclassification is a problem nationwide, it’s most prevalent in Southern states that have few unions and an abundance of immigrant labor.

How to properly classify employees

Companies don’t have to—or get to—decide which workers are employees and which are independent contractors. The IRS and the DOL have spelled that out.

Generally, if the company dictates when and how the job gets done, those doing it are employees. Self-employed contractors typically set their own schedules; own their tools and supplies; made decisions on their own about how to do the work; and earn enough to cover their overhead and pay their own wages.

A 2009 GAO report noted that the IRS disagreed with employers 97% of the time when asked if a worker qualified as an independent contractor.

To learn the government guidelines for classifying employees, visit www.irs.gov.

Solving the problem

Experts interviewed by McClatchy offered six ways states and the federal government could reduce or eliminate misclassification of construction workers among employers with government contracts:

1 Refuse to accept payroll records from companies that do not withhold taxes.

2. Require government contractors to attend training to learn how to properly classify employees.

3.  Create coalitions of employers who refuse to misclassify workers, and then do business only with members of those coalitions.

4. Keep a database of cheaters and require agencies to check it before awarding future government contracts to those companies.

5. Share and adopt the best practices of states and federal agencies for combating misclassification.

6. Use technology to uncover fraud, tax schemes, unpaid taxes and misclassification.