As Minnesota puts fraud under the microscope, there’s one type it shouldn’t neglect: payroll abuses

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Fraud has gripped the Minnesota Legislature, dominating headlines and fueling legislative debates. From Medicaid mismanagement to tutoring scams to lost food for children, the focus on rooting out fraud is evident across party lines. In response, Gov. Tim Walz’s administration has initiated a new centralized unit to tackle fraud, and Republicans have made fraud eradication one of their top legislative priorities. But amid this urgent push, one form of fraud that robs workers, honest businesses and taxpayers of billions of dollars remains dangerously overlooked: payroll fraud.

Far from a harmless loophole, payroll fraud, or misclassification fraud, is a scam that cheats workers out of their earnings and forces taxpayers to eat the cost. When employers misclassify employees as independent contractors or pay them “off the books” in cash, they are dodging payroll taxes, denying workers critical protections, including minimum wage and overtime pay, as well as access to important programs like workers’ compensation.

By avoiding legally required payments into these programs, payroll fraud deprives the state of essential revenue. Minnesota’s taxpayers ultimately foot the bill, covering the shortfalls left by fraudulent businesses that refuse to pay into the system.

In addition to workers and taxpayers, honest business owners are harmed. With payroll fraud going unchecked, unscrupulous employers have built this practice into their business models, allowing them to illegally slash labor costs such that they can undercut law-abiding employers who play by the rules.

The scale of the harm caused by payroll fraud is staggering. According to our recent analysis, an estimated 9.4% of all private-sector workers in Minnesota are affected by payroll fraud, costing them up to $6.2 billion annually. In sectors with high immigrant employment, the reality is worse.

Meanwhile, the Minnesota government loses between $506 million and $1.3 billion each year in tax revenue, including up to $108 million in Unemployment Insurance (UI) contributions. That money should be helping workers through tough times, but instead, it’s lining the pockets of bad actors who exploit the system. And the impact is already rippling outward: With UI tax rates set to rise in 2025, every law-abiding employer and worker will soon feel the financial impact of payroll fraud.

This analysis is the first to expose the full scale of the problem statewide, but the findings are consistent with earlier studies of this problem in specific industries. A report by the Midwest Economic Policy Institute revealed that nearly a quarter of Minnesota’s construction workers — 23% — have been victims of payroll fraud. These workers saw their paychecks slashed by an average of 36%, losing millions of dollars that should have gone toward supporting their families. Meanwhile, the state hemorrhaged $136 million, resulting in less funding for schools, roads and other critical public services.

The human cost of payroll fraud falls heaviest on those least able to fight back. Immigrant workers, who are disproportionately employed in industries like construction and agriculture, are particularly hard hit. Many face obstacles to reporting these abuses due to fear of retaliation, language barriers or lack of familiarity with labor protections — creating a perfect storm that leaves them robbed of wages and without recourse. Allowing payroll fraud to continue deepens inequality among immigrant workers and non-immigrant workers.

In the 2023-24 biennium, the Minnesota Legislature passed laws to strengthen coordination between the agencies tasked with addressing payroll fraud, as well as stiffer penalties to create accountability for those defrauding Minnesota’s workers and taxpayers. While commendable, these measures are not enough.

The Attorney General’s Task Force on Worker Misclassification has outlined a roadmap to help legislators further crack down on payroll fraud. However, fundamental reforms needed to protect workers and honest businesses remain stalled. Meanwhile, greedy employers keep cheating the system because they know they can get away with it, costing Minnesota’s workers and taxpayers billions of dollars.

It’s encouraging that lawmakers are taking fraud seriously this session, but they seem to be missing one of the biggest heists happening right under their noses. The choice they face is clear: Continue allowing cheaters to thrive at the expense of workers, honest businesses and taxpayers, or take a stand for fairness, accountability and economic justice.

Every day that lawmakers delay action on payroll fraud, cheating employers steal millions more from Minnesota’s workers and drain money from our schools, roads and communities. We can’t afford to wait. By addressing payroll fraud with solutions that match the scale of the problem, legislators can take meaningful steps to support honest businesses, safeguard billions of taxpayer dollars, and protect hardworking Minnesotans.

Jake Schwitzer is executive director of North Star Policy Action, an independent research and communications institute.