A research study to review the current state of the underground economy in Massachusetts got underway during 2013, through a partnership among DOR, DUA, and the JTF. The study’s purpose was to estimate the frequency, scale, and consequences of misclassification and the underground economy on the Commonwealth. Revenue Solutions, Inc. (RSI) was selected by DOR as a partner of the JTF, to undertake the analysis and write a report of their findings. The RSI report provides a detailed description of the specific aims and analyses they undertook. The JTF created a Technical Advisory Board (TAB) to work with the RSI team during their analysis. Because of the confidentiality of the data, the TAB could not and did not participate in the creation of the data set or the analysis of the data. It did provide, through a series of meetings with the JTF and RSI throughout the study period, responses and suggestions regarding the analysis. The TAB was also charged with writing an independent assessment of the study findings based on RSI’s final report to the JTF. The TAB delivered their final report to the JTF on March 31, 2014.
The study resulted in a description of the current degree and volume of contracting in the Massachusetts economy, including an analysis of the fiscal impact caused by employee misclassification on state tax revenues and the unemployment insurance tax system.
Department of Revenue (DOR): Contracted with EOLWD/JTF to conduct study; supplied data (business filings of state and federal W-2 employment and 1099 contracting from 1999-2010); holds the data warehouse
Department of Unemployment Assistance(DUA): Provided audit data from 2000-2010 to be run again DOR tax reporting data
Revenue Solution, Inc. (RSI): Contracted by DOR to combine DOR and DUA data, run queries, compile data, and compile results into a study report
Technical Advisory Board (TAB): provided to EOLWD an independent review and report of the RSI study’s findings. TAB included two professors from BU: David Weil and Jim Rebitzer
In order to protect the health of the Commonwealth’s economy, its workers and its businesses, the Executive Office of Labor and Workforce Development (EOLWD)/ Joint Task Force on the Underground Economy and Employee Misclassification (JTF), engaged two consultants to work with EOLWD to spearhead a research study to be conducted by the Department of Revenue (DOR) on the state of employment fraud and employee misclassification in Massachusetts. DOR, as a member of the JTF, contracted with Revenue Solutions, Inc. (RSI) to have an analysis conducted to provide the best estimate possible of the frequency of employee misclassification and underground economy activity in the Commonwealth by industry category.
EOLWD sought to engage a contractor with considerable professional experience administering and developing research related to the economy and workplace issues; and knowledge, experience, and demonstrated proven results in producing research studies and comment on related topics. EOLWD contracted with David Weil, Ph.D., and James Rebitzer, Ph.D., who, combined, have over 30 years of experience in administering, developing, performing, publishing, and presenting research related to the economy and workplace issues.
David Weil received his Ph.D. in public policy in 1987 from Harvard University. He has authored and co-authored four books and has published over 80 articles and publications in a variety of refereed economics, public policy, management, and industrial relations journals and books, as well as numerous publications in non-academic outlets. His recent work has focused on how the restructuring of businesses in many industries—the “fissuring of the workplace”—has increased problems of non-compliance with labor standards, raised health and safety hazards in many workplaces, and contributed to wage stagnation. Dr. Weil is an internationally recognized expert in public and labor market policy; regulatory performance; industrial and labor relations; transparency policy; and supply-chain restructuring and its effects. Dr. Weil was a Professor of Economics at Boston University School of Management and served as co-Director of the Transparency Policy Project at Harvard’s Kennedy School of Government, until he was sworn in as the Administrator of the Wage and Hour Division for the U.S. Department of Labor on May 5, 2014.
James Rebitzer received his Ph.D in economics in 1986 at the University of Massachusetts at Amherst. His doctoral dissertation concerned the relationship between unemployment and firm personnel practices. Since that time he has published more than 35 refereed articles and book chapters, all of which concern some aspect of workplace personnel practices or labor market outcomes. Dr. Rebitzer has a long familiarity with labor market and workplace issues in Massachusetts, acquired from his Ph.D. training at UMass Amhert and in part from his 10 years teaching human resources management at MIT’s Sloan School of Management. He is Professor and Chair of Markets, Public Policy & Law Department at the Boston University School of Management.
EOLWD elected to fund the study with monies received as a result of a settled lawsuit against FedEx for misclassification of employees. In July of 2010, Massachusetts (through the Attorney General’s Office) entered into a multimillion dollar agreement with FedEx Ground to settle the claim that the company misclassified its drivers as independent contractors. FedEx Ground agreed to pay $3.05 million to Massachusetts’ general fund to settle the claim. EOLWD was given a portion of that settlement money to put toward efforts to thwart the underground economy.
Key findings of Study:
- The report estimates an average annual loss of unemployment insurance taxes at $87M; a total of close to $950M over the study period, due to misclassification or non-reporting of employees.
- In 2001, contractors associated with a singular contract relationship accounted for 66.3% of all contracting relationships, whereas in 2010, this ratio had grown to 82%. The TAB reports that this suggests a change in the nature of contracting evidenced during the study period.
- Businesses that misclassify pay workers about 14% less than those that do not misclassify. This is true for both their contractors and their employees.
- Businesses using contractors exhibited misclassification and/or underreporting of wages at rates TWICE that of other audited establishments not using contractors.
- This study project has assembled a data warehouse of eleven years’ worth of data of contracting in Massachusetts, which has never been done before.
- The JTF is currently in talks with DOR about how to make the data warehouse available to the robust research and academic community here in Massachusetts.
Findings and Implications of the RSI Report to the Joint Task Force on Employee Misclassification and the Underground Economy: Contractor Use, Analysis, and Impact Results