Report: Employers steal billions from workers’ paycheck each year

For the past four decades, the majority of American workers have been shortchanged by economic policymaking that has suppressed the growth of hourly wages and prevented greater improvements in living standards. Achieving a secure, middle-class lifestyle has become increasingly difficult as hourly pay for most workers has either stagnated or declined. For millions of the country’s lowest-paid workers, financial security is even more fleeting because of unscrupulous employers stealing a portion of their paychecks.

Wage theft, the practice of employers failing to pay workers the full wages to which they are legally entitled, is a widespread and deep-rooted problem that directly harms millions of U.S. workers each year. Employers refusing to pay promised wages, paying less than legally mandated minimums, failing to pay for all hours worked, or not paying overtime premiums deprives working people of billions of dollars annually. It also leaves hundreds of thousands of affected workers and their families in poverty. Wage theft does not just harm the workers and families who directly suffer exploitation; it also weakens the bargaining power of workers more broadly by putting downward pressure on hourly wages in affected industries and occupations. For many low-income families who suffer wage theft, the resulting loss of income forces them to rely more heavily on public assistance programs, unduly straining safety net programs and hamstringing efforts to reduce poverty.

Researchers have long known that measuring wage theft is challenging—it takes many forms, violations are not always recognized or reported, and suitable public data sources are limited. Yet in recent years, several studies have attempted to better quantify the harm caused by wage theft. This study adds to those efforts by using data from the Current Population Survey to assess the prevalence and magnitude of wage theft in the form of minimum wage violations—i.e., workers being paid at an effective hourly rate below the binding minimum wage. We look specifically at instances of such wage theft in the 10 most populous U.S. states: California, Florida, Georgia, Illinois, Michigan, New York, North Carolina, Ohio, Pennsylvania, and Texas. We limit our focus to these 10 states so that we can carefully account for each state’s individual minimum wage policies and state-specific exemptions to wage and hour laws. Data for the 10 most populous states also provide adequate sample sizes to describe the severity of minimum wage violations and the affected populations within each state. Our findings provide a better assessment of minimum wage violations than previous studies that have only considered violations of the federal minimum wage. And, because the total workforce in these 10 states accounts for more than half of the entire U.S. workforce, our estimates shed new light on the scope of wage theft nationwide.

Key findings

We find that:

  • In the 10 most populous states in the country, each year 2.4 million workers covered by state or federal minimum wage laws report being paid less than the applicable minimum wage in their state—approximately 17 percent of the eligible low-wage workforce.
  • The total underpayment of wages to these workers amounts to over $8 billion annually. If the findings for these states are representative for the rest of the country, they suggest that the total wages stolen from workers due to minimum wage violations exceeds $15 billion each year.
  • Workers suffering minimum wage violations are underpaid an average of $64 per week, nearly one-quarter of their weekly earnings. This means that a victim who works year-round is losing, on average, $3,300 per year and receiving only $10,500 in annual wages.
  • Young workers, women, people of color, and immigrant workers are more likely than other workers to report being paid less than the minimum wage, but this is primarily because they are also more likely than other workers to be in low-wage jobs. In general, low-wage workers experience minimum wage violations at high rates across demographic categories. In fact, the majority of workers with reported wages below the minimum wage are over 25 and are native-born U.S. citizens, nearly half are white, more than a quarter have children, and just over half work full time.
  • In the 10 most populous states, workers are most likely to be paid less than the minimum wage in Florida (7.3 percent), Ohio (5.5 percent), and New York (5.0 percent). However, the severity of underpayment is the worst in Pennsylvania and Texas, where the average victim of a minimum wage violation is cheated out of over 30 percent of earned pay.
  • The poverty rate among workers paid less than the minimum wage in these 10 states is over 21 percent—three times the poverty rate for minimum-wage-eligible workers overall. Assuming no change in work hours, if these workers were paid the full wages to which they are entitled, less than 15 percent would be in poverty.

The next section provides background on the minimum wage, the problem of wage theft in general, and previous research on the topic of wage theft. The subsequent sections present our findings and analysis of minimum wage violations in the 10 most populous states. The final section discusses the economic and social consequences of wage theft and what can be done to fight it.

Background and previous research

The longstanding need to update the Fair Labor Standards Act

The Fair Labor Standards Act (FLSA), enacted in 1938, established the basic protections that have governed work in the United States since the Great Depression. With regard to pay, the FLSA “put a floor under wages and a ceiling over hours” through the creation of the federal minimum wage and provisions for overtime pay—i.e., a limit on the hours per week employees may work without receiving additional compensation (Roosevelt 1938). Over the years, the law has been periodically updated to strengthen protections or expand coverage to new classes of workers—such as the 1966 amendments to the FLSA that extended coverage to service sector and hospitality workers, and the Department of Labor’s extension of FLSA protections to home care workers in 2015.

Unfortunately, over the past several decades, updates to the FLSA have been inadequate or too infrequent to keep pace with changes in the economy and employment. For example, as explained in Cooper (2015), the failure of federal lawmakers to adequately raise the federal minimum wage has left millions of workers being paid 25 percent less in inflation-adjusted terms than their counterparts almost 50 years ago. Similarly, Eisenbrey and Kimball (2016) describe how neglect of federal overtime rules has drastically reduced the share of the workforce that is eligible for overtime pay.

Additionally, in recent decades, employers have increasingly adopted business practices that have weakened the scope of protection afforded by the law. Groundbreaking research by the former Administrator of the U.S. Department of Labor’s Wage and Hour Division, David Weil, documents the “fissuring” of U.S. workplaces and the growth of subcontracting (Weil 2014). Fissuring refers to the practice of companies contracting out various functions that were previously done in-house. In such arrangements, unscrupulous employers—be it the subcontractor or the contracting parent company—will sometimes use the multilayered or “fissured” nature of the employer-employee relationship to attempt to avoid responsibility when workers allege mistreatment. Weil also details how a growing share of the workforce today are classified as independent contractors—and thereby not covered by the FLSA—despite the fact that these workers perform tasks traditionally done via direct employment. In some cases, such arrangements are deliberate and illegal misclassification by employers seeking to dodge the tax and regulatory requirements of regular employment. Carré (2015) notes that numerous studies find that 10 to 20 percent of employers have misclassified a worker as an independent contractor.

Read full report here.