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Missouri has lagged behind other states in identifying employers that avoid taxes and other payments by classifying their workers as contractors.

 An audit of the Missouri Department of Labor and Industrial Relations released Tuesday found that from 2005 to 2009 only Iowa identified fewer misclassified workers.

A worker is considered "misclassified" when an employer improperly classifies a worker as an independent contractor rather than an employee. Some employers may misclassify workers unintentionally; other employers may intentionally misclassify workers to significantly reduce labor costs and related employment taxes.

Misclassified workers negatively impact the state because of lost income taxes, lost unemployment taxes and lost workers’ compensation taxes said State Auditor Susan Montee in a media release.

Besides taxes, businesses can avoid unemployment and workers' compensation payments by calling their workers contractors, rather than employees.

Labor officials estimate the misclassification costs the state's unemployment fund $10 million annually and the workers' compensation fund $215,000. It also leads to the underreporting of $423 million in wages for taxes.

The MoDOLIR ranks 50th of 51 state labor agencies (includes the District of Columbia) in the nation in misclassified worker audit effectiveness, according to United States Department of Labor data from calendar years 2005 to 2009.

State labor officials said review procedures have changed so attention is devoted to industries with more problems.