What is the Joint Task Force of the Underground Economy and Employee Misclassification?
On March 12, 2008, Governor Deval L. Patrick signed Executive Order #499 establishing the Joint Enforcement Task Force on the Underground Economy and Employee Misclassification (Task Force or JTF). Charged with coordinating the efforts of multiple state agencies to stamp out fraudulent employment activities, the Task Force is working to level the playing field in order to increase fair business competition.
The Massachusetts JTF has a full-time Program Coordinator and an Interim Director, as well as resources from 14 state agencies which work together in investigating fraudulent employment activities under the state’s labor, licensing, and tax laws. Current partner agencies include:
- Alcoholic Beverages Control Commission (ABCC)
- Attorney General’s Fair Labor Division (AGO-FLD)
- Department of Industrial Accidents (DIA)
- Department of Labor Standards (DLS)
- Department of Public Safety (DPS)
- Department of Revenue (DOR)
- Department of Unemployment Assistance (DUA)
- Division of Banks (DOB)
- Division of Capital Asset Management and Maintenance (DCAMM)
- Division of Professional Licensure (DPL)
- Insurance Fraud Bureau (IFB)
- Massachusetts Office of Refugees and Immigrants (MORI)
- Office of Small Business and Entrepreneurship (OSBE)
- Supplier Diversity Office (SDP)
Many JTF partners, such as DUA, DIA, DLS, DOR, AGO-FLD, and the IFB have strong working relationships with federal authorities. We utilize these existing channels of cooperation to maximize any potential assistance that can be provided in addressing the underground economy in Massachusetts. We have developed relationships with Task Force counterparts in other states to share new ideas involving methods of cross-agency enforcement, and to open potential avenues for multi-state enforcement initiatives.
On September 19th 2011, at the offices of the United States Department of Labor (US DOL) in Washington D.C., United States Secretary of Labor Hilda L. Solis, Internal Revenue Service Commissioner Douglas H. Shulman, Massachusetts Secretary of Labor and Workforce Development Joanne Goldstein, representatives of Massachusetts Attorney General Martha Coakley’s Fair Labor Division, along with six state labor commissioners from around the country signed memoranda of understanding on the improper classification of employees as independent contractors or other non-employees. Following the signing, Secretary Solis, Commissioner Shulman and state officials took part in a national press teleconference to discuss how the U.S. Department of Labor, the IRS and state agencies will embark on new efforts, guided by these memoranda, to protect the rights of employees and level the playing field for responsible employers by reducing the practice conducted by some businesses of misclassifying employees.
Massachusetts’ agreement with the US DOL, one of seven state agreements signed in September 2011, includes participation from all JTF member agencies and the US DOL’s Wage and Hour Division, Employee Benefit Security Administration, Occupational Safety and Health Administration, and the Office of Federal Contract Compliance Programs. This robust level of cooperation in the Commonwealth with these federal labor law enforcement entities only enhances the JTF’s existing multi-agency efforts.
What is the Underground Economy?
"Underground economy" is a term that refers to those individuals and businesses that utilize schemes to conceal their employment activities to abscond from one or more of their employer responsibilities related to wages, payroll taxes, insurance requirements, licensing requirements, safety regulations, and other regulatory requirements. The underground economy includes related activities commonly known as tax evasion, payroll fraud, under-the-table work, and wage theft. It can include but is not limited to: paying wages in cash, skimming some or all of the cash takings, not paying overtime, paying sub-minimum wages, underreporting employees, classifying employees as independent contractors, forcing employees to set up shell subcontractor entities, running a part of their normal business activities 'off-the-books', not reporting the value of goods and services provided in exchange for other goods and services, avoiding their tax and superannuation obligations by not registering their business or obtaining the proper licenses and insurance policies.
Why would a business engage in these types of activities?
Simply put—money. When a business operates in the underground economy, it illegally reduces the amount of money expended for insurance, payroll taxes, licenses, employee benefits, safety equipment, and safety conditions. These employers then gain an unfair competitive advantage over businesses that comply with the various business laws. This causes unfair competition in the marketplace and forces law-abiding businesses to pay greater expenses.
Are workers actually harmed by working for these businesses?
Employees of businesses that do not comply with labor, licensing, and tax laws are negatively affected. Their working conditions may not meet safety requirements, which can put them in danger. They may have limited causes of action against their employers for issues such as discrimination and on-the-job accidents. Their wage earnings may be lower than those required by law, and benefits to which they are entitled may be illegally denied or delayed because their wages are not properly reported. Neither they, nor their employer, may be paying their share of taxes for Social Security and Medicare, so the employee is not earning credits for Social Security eligibility upon reaching the age of retirement. Where an employer goes to lengths to avoid their responsibilities, it is safe to assume that such a business may be paying low wages and is exploiting workers who are not inclined to report violations to authorities.
I’m an employee of a legal, upstanding business. Why should I be concerned about the underground economy if I’m not a part of it?
There are two points to be made in this regard. First, all members of our society are harmed by the underground economy because legitimate businesses, ratepayers, and taxpayers all subsidize the costs of the businesses which are cutting corners on their legal obligations. Under-insured businesses can cause higher workers’ compensation insurance premiums for everyone; unregistered businesses not paying their unemployment insurance taxes creates unfunded liabilities and artificially high unemployment insurance premiums; cash wage payments to workers skirt federal and state taxes that are used to fund things like repairs to roads and bridges, transportation services, help for schools, education, and other local services. Second, everyone, regardless of his/her employer, is a consumer, and consumers drive the demand labor, goods, and services. Consumers may unwittingly be contributing to the underground economy through their buying choices. If you utilize an unlicensed business to perform work so that you can save a few dollars, you may sacrifice quality, safety, and protection, since licensing provisions are designed to ensure minimum levels of skill and knowledge to protect the consumer. If you go with the lowest bidder on a job to provide you with a service, and that bidder’s estimate is well below the others, that employer may be cheating his/her workers out of wages they work hard to earn. If your contractor tells you they only accept payments in cash, are you helping someone to avoid a wage garnishment or payment of child support?
How does the underground economy hurt Massachusetts?
Whenever a business operates outside the legitimate economy several problems arise. When a business attempts to conceal its activities they may do so to avoid taxes, safety regulations, wage laws, and required insurance policies (i.e. workers' compensation insurance). Doing so exposes the employees of that business to the possibility of uninsured injuries, denial of unemployment benefits, and eliminates incentives to operate the business safely. Uninsured injuries cost the Commonwealth and its legitimate businesses millions of dollars each year. Similarly, avoiding unemployment insurance (UI) creates unfunded liabilities that cause artificially high UI premiums. Such businesses also seek to avoid paying their fair share of taxes. Such revenues are required for the state to provide basic services to its residents.
When added together, operating outside the law allows unscrupulous businesses to have an unfair advantage by way of illegitimately lowering costs and can therefore underbid all others. This takes business away from law-abiding businesses and their employees who are trying to make an honest living. The ultimate impact is an erosion of our social fabric, economic stability, and working conditions in the Commonwealth.
How is the Joint Task Force combating underground economy and employee misclassification issues?
The Joint Task Force (JTF) uses multiple methods to level the playing field, such as following up on tips from the Task Force hotline and online referral system. Because of the types of complaints that we receive, there are certain partner agencies that are more likely to play a larger role in investigating these complaints, such as the Departments of Revenue, Industrial Accidents, Unemployment Insurance, and the Attorney General’s Fair Labor Division. We have an investigative team which consists of enforcement staff from partner agencies that collaborate to investigate referrals, tips, and complaints.
In addition to investigating tips and complaints, we also engage in compliance checks across agencies. Some of our more successful efforts have been among state licensing entities cross-checking with the Department of Unemployment Assistance (DUA) to ensure that a business seeking a license to operate is in compliance with its unemployment insurance tax obligations.
The JTF has seen increasing success with each passing year. During its first year of existence, the JTF recovered just under $1.5M, and in 2011, the JTF recovered over $10M in revenue, in efforts directly related to the Task Force. This success is a result of strong partnerships, dedication, and communication among multiple state agencies.
What is Employee Misclassification?
Employee misclassification happens when a company classifies a worker as an independent contractor when by law the worker is considered to be an employee. One of the differences between an employee versus an independent contractor is how these workers are paid. An employee is a “W-2 employee” who is on an employer payroll, having payroll deductions and tax contributions made on his/her behalf by the employer, where an independent contractor is solely responsible for his/her own tax contributions.
Employee misclassification is a form of employer fraud that has many ramifications. For example, 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, businesses within high-risk industries and those that have poor claims experience pay more for their insurance premiums. When a company misclassifies its workers, they are essentially misrepresenting the true nature or size of their business to their insurance carrier and various government organizations.
Employee misclassification reduces an employer's labor and related costs, thereby allowing the business to significantly underbid competitors. Although employee misclassification can be the result of a misunderstanding of the law or classification definitions, it most frequently occurs when an employer is looking for ways to cut costs. This tactic is illegal and unfair.
What is the Massachusetts Independent Contractor/Misclassification Law?
Excerpted from the 2008 Advisory from the Massachusetts Attorney General’s Fair Labor Division on the Massachusetts Independent Contractor Law.
The need for proper classification of individuals in the workplace remains of paramount importance to the Commonwealth. Misclassification deprives individuals of the many benefits, both public and private, that employees enjoy. The Commonwealth is also harmed by misclassification in the form of lost revenue and increased costs. Furthermore, misclassification undermines fair market competition and negatively impacts the business environment in the Commonwealth.
Massachusetts’ Independent Contractor Law (M.G.L. c. 149, sec.148B) provides a three-prong test which requires that all three elements must exist for an individual to be classified other than as an employee.
- Prong One: Freedom from Control—the individual must be “free from control and direction in connection with the performance of the service, both under his contract and for the performance of service and in fact” in order for the individual to be an independent contractor. Note that an employment contract or job description indicating that an individual is free from supervisory direction or control is insufficient by itself to classify an individual as an independent contractor under the law.
- Prong Two: Service Outside the Usual Course of the Employer’s Business—the service that the individual performs must be “outside the usual course of business of the employer” in order for the individual to not be classified as an employee.
- Prong Three: Independent Trade, Occupation, Profession, or Business—the individual must be “customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed” in order for the individual to be classified other than as an employee
An employer’s failure to withhold taxes, contribute to unemployment compensation, or provide workers’ compensation insurance is not considered when analyzing whether an employee has been appropriately classified as an employee. Hence, an employer’s belief that a worker should be an independent contractor has no relevance in determining whether there has been a violation of the law.
To read the full Advisory from the Massachusetts Attorney General’s Fair Labor Division on the Massachusetts Independent Contractor Law or the Massachusetts Misclassification Law, visit:
Am I an independent contractor?
Independent contractors serve a vital role to many business operations. Often a company will look to use independent contractors when a short term project arises that requires specialized skills or knowledge not present within its own business. Other companies rely on independent contractors as part of their business model to provide services such as consulting and training. Regardless of why a business uses independent contractors, the use of these services can save a company hundreds of thousands of dollars in reduced taxes and insurance costs. These are precisely the economic incentives that cause a dishonest employee to classify its own employees as independent contractors.
In July of 2004, Massachusetts passed the Independent Contractor Law [Chapter 193 of the Acts of 2004] which narrowed the standard for determining independent contractor 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 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.
To read the full Advisory from the Massachusetts Attorney General’s Fair Labor Division on the Massachusetts Independent Contractor Law or the Massachusetts Misclassification Law, visit:
Who needs Workers' Compensation Insurance in Massachusetts?
With limited exception, every employer in the Commonwealth with one or more employees 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.
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 mind set that they can save a few dollars. Workers' compensation insurance is a mandatory labor cost just like unemployment insurance and Federal Insurance Contributions Act (FICA) 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.
Which employers are covered by the Unemployment Insurance law?
Unemployment insurance (UI) is a temporary income protection program for workers who are unemployed through no fault of their own and who are able to work, available for work and looking for employment. Funding for UI benefits comes from quarterly contributions paid by the state's employers; no deductions are made from workers' salaries.
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. Employer responsibilities fall into two general areas: financing the unemployment insurance (UI) program and participating in the determination of eligibility.
In general, if you have people working one or more days in each of 13 weeks during a calendar year, or if you pay wages of $1,500 or more in any calendar quarter, you are liable for contributions under the law. The weeks of employment need not be consecutive, nor must the employees remain the same. In deciding whether an employer is liable for contributions, the Department of Unemployment Assistance (DUA) considers such factors as:
- The entity (company) for which services are performed.
- The degree of direction and control you have over the way an employee's services are performed.
- Where the work is performed, whether entirely or only partially in Massachusetts.
- The exempt nature of certain classes of employment.
As an agricultural employer, you are subject to the law if you paid total cash wages of $20,000 or more in any calendar quarter, or you employed 10 or more individuals on any day in each of 20 weeks in a calendar year.
If you employ domestic workers and paid $1,000 or more in cash wages in any calendar quarter, you are liable. This category includes private homeowners, clubs, college fraternities and sororities.
Employers can appeal decisions regarding whether or not they are subject to the law; and whether or not an employer/employee relationship exists in terms of determining eligibility for unemployment insurance. As with all appeal rights under the UI program, these are covered in detail on the forms sent to the employer when this type of determination is made.