Frequently Asked Questions About The Underground Economy Task Force

1. What is "Employee Misclassification"?

Employee misclassification is a form of employer fraud that comes in many shapes and sizes. A workers' compensation insurance premium is calculated primarily using three factors: the size of the payroll, the degree of risk and the claims experience of each business. Therefore, companies within high-risk industries and those that have poor claims experience pay more for their insurance premiums. When a company misclassifies their workers, they are essentially misrepresenting the true nature or size of their business to their insurance carrier and various government organizations. Although employee misclassification can be the result of an honest misunderstanding of law or complex classification definitions, it most frequently occurs when an employer is looking for ways to cut costs.

Most commonly, employee misclassification transpires in the construction industry when an employer deliberately misclassifies their workers as "independent contractors," to avoid paying workers' compensation insurance and other state, federal or Social Security taxes. However, misclassification can be as simple as disguising the high-risk nature of the work being conducted, such as stating that a business employs clerical workers while in reality they are employing roofers. The bottom line, employee misclassification reduces an employer's personnel costs, thereby allowing the business to significantly underbid their competition.

2. Am I an Independent Contractor?

Independent contractors (ICs) serve a vital role to many business operations. Often a company will look to use ICs when a short term project arises that requires specialized skills or knowledge not present within their own business. Other companies rely on ICs as part of their business model to provide services such as transportation, consulting, and physical training. Regardless of why a business uses ICs, one  thing is clear - the use of ICs can save a company hundreds and thousands of dollars in reduced taxes and workers' compensation costs. These are precisely the economic incentives that cause a dishonest employee to classify their own employees as ICs.

In July of 2004, Massachusetts passed the Independent Contractor Law [Chapter 193 of the Acts of 2004] which narrowed the standard for determining IC status. Specifically, the Massachusetts law created a presumption that a work arrangement is an employer-employee relationship unless the party receiving the services can overcome three rigid legal presumptions of employment: First, the worker must be free from the presumed employer's control and direction in performing the service, both under a contract and in course of business. Second, the service provided by the worker must be outside the employer's usual course of business. Finally, the worker must be customarily engaged in an independent service performed. Clearly, the new Independent Contractor Law will force many employers to reevaluate the way they conduct business.

3. What are my rights as an employee?

• The Massachusetts Workers' Compensation system is in place to make sure that workers are protected by insurance if they are injured on the job or contract a work-related illness.

Under this system, employers are required by Massachusetts General  Laws c. 152,  § 25A to provide workers' compensation (WC) insurance coverage to all their employees. This insurance pays for any necessary medical treatment related to the injury or illness and also pays compensation for lost wages after the first five calendar days of full or partial disability.

The Department of Industrial Accidents (DIA) is the agency responsible for administering the workers' compensation law in Massachusetts. They can be reached at 1-800-323-3249 in Massachusetts or 617-727-4900 outside of Massachusetts. You may visit their website at www.mass.gov/dia.

• All employees are entitled to unemployment assistance.

1. The Division of Unemployment Assistance (DUA) administers the Unemployment Insurance program, providing temporary assistance to unemployed Massachusetts workers.

2. The Massachusetts Unemployment Insurance Law, Chapter 151A of the General Laws of the Commonwealth, places certain obligations on all employing units - individuals, firms, organizations and governmental units which employ one or more persons. Employers' responsibilities fall into two general areas: financing the unemployment insurance (UI) program and participating in the determination of eligibility. You may contact DUA at 617-626-6560 or visit their website at www.mass.gov/dua.

4. Who needs Workers' Compensation Insurance in Massachusetts?

With limited exception, every employer in the Commonwealth with one or more employee(s) is required by law to have a valid workers' compensation policy at all times. This "no fault" insurance not only provides injured workers with medical care and partial wage replacement, but also protects the policyholders from potentially damaging lawsuits. Although most companies in Massachusetts purchase a traditional commercial insurance policy, there are alternative methods of coverage which include licensing as a self insurer, gaining membership in a self insurance group, or obtaining coverage in the Assigned Risk Pool. With a broad variety of insurance and pricing options, there is no excuse for a business not to be covered.

5. Why do some employers operate without WC Insurance?

Money. While the vast majority of the Commonwealth's employers purchase workers' compensation insurance, there are still those that make a conscious business decision to operate without coverage with the mindset that they can save a few dollars. Workers' compensation insurance is a mandatory business cost just like unemployment insurance, electricity and state and local taxes. Although workers' compensation costs have dramatically decreased since the 1991 Reform Act, an individual company's premium can vary significantly depending upon the nature of the industry, past injury experience and the amount of payroll. In some instances, employers operate without workers' compensation insurance due to ignorance of the law.