Conclusion

This report provides clear evidence that payroll fraud is rampant in Rhode Island. Data provided by the Department of Labor and Training are unequivocal in identifying that worker misclassification exists in every corner of the state economy. Records from UI audits reflect that misclassification is especially prevalent in residential construction, certain types of specialty trades contractors, janitorial services and landscaping. And this is just the tip of the iceberg given the difficulty of proving under-the-table, cash payments to workers and the presence of unregistered employers such as “labor brokers” in construction. Consequently, the results of UI audits represent a lower-bound estimate of the full extent of illegal labor practices in Rhode Island.

Payroll fraud is typically rooted in an employer’s desire to reduce labor costs to improve their own bottom line. But these actions have real consequences for Rhode Island society. Workers who are misclassified as independent contractors are denied their legal rights to overtime pay, social insurance (e.g., workers’ comp, UI), OSHA protections, and other benefits afforded to employees, thereby exacerbating the precariousness of workers’ physical and financial well-being. The competitive position of law-abiding employers is also undermined by firms engaged in misclassification. This compels some fair-minded business owners to either take part in these actions or exit the industry altogether, resulting in a “race to the bottom” in their respective industries. Finally, misclassification amounts to a form of tax evasion that leads to tens of millions of dollars in revenue shortfalls for critical state programs and overall revenues in Rhode Island on an annual basis.

The prevalence of worker misclassification in Rhode Island should come as no surprise. A 2009 report submitted to the General Assembly featured considerable testimony and statistical evidence highlighting its presence. The Rhode Island Underground Economy and Employee Misclassification Task Force was created in 2015 with annual reports documenting important cases and summarizing the volume of activity surrounding enforcement efforts. Reports from other states—such as an in-depth 2021 report on conditions in the Massachusetts construction industry—also highlight just how deep-rooted illegal labor practices are within some industries in New England and across the United States.⁴¹

In Rhode Island, illegal misclassification appears to be getting worse. A review of UI audits from 2008 discovered 6% of employers misclassifying at least one worker. In comparison, UI audits summarized in this report document that 9.3% to 12.2% of employers were engaged in similar conduct between 2016 and 2021. This is a substantial increase.

Furthermore, the authors’ interviews with construction stakeholders in Rhode Island, Massachusetts, and other parts of the country suggest a growing consensus that misclassification in the industry has increasingly gone underground over the past two decades. This means that misclassification has morphed away from a more easily-detectable way of established businesses issuing 1099-MISCs instead of W-2s. Instead, there has been a sharp increase in off-the-books payments and a reliance on unregistered labor brokers operating entirely in the shadows of the construction industry and paying workers primarily in cash. The lack of a paper trail makes this form of misclassification extraordinarily difficult to prove, suggesting that the statistical evidence on misclassification offered in this report— particularly in the construction sector—is likely undercounting the full extent of the problem.

Policy Recommendations

Based on the authors’ research, multiple policy options hold considerable promise in restoring worker rights and ensuring greater justice in Rhode Island’s workplaces. The first would be to make wage theft a felony. While other forms of stealing—embezzlement ($100 or more) and grand larceny ($1,500 or more)—are treated as felonies in Rhode Island, wage theft is only a misdemeanor no matter the dollar amount. It is clear that many employers simply see the fines and penalties associated with a misdemeanor for wage theft—if they are ever caught in the first place—as simply the “cost of doing business.” Until employers’ calculus around this issue is changed, it is difficult to see how Rhode Island can counter this race to the bottom.

This issue is not restricted to Rhode Island. But legislators in other states have started to awaken to the recognition that wage theft will continue unabated without upgrading the penalties associated with the crime. As an example, Minnesota made wage theft a felony in 2019 for any employer convicted of stealing at least $500 from employees.⁴² In 2020, Colorado enacted a law passed the previous year that made wage theft a felony for unpaid wages in excess of $2,000.⁴³ In 2021, California approved a new law that upgraded wage theft from a misdemeanor to a felony for cases involving at least $950 from one employee or $2,350 from multiple employees over a 12-month period.⁴⁴ Enacting a similar law in Rhode Island would offer more significant deterrence against wage theft and provide prosecutors with the necessary tools—specifically, the impaneling of grand juries—to more effectively pursue these cases.

This study has demonstrated that worker misclassification is rampant in Rhode Island, a finding that is consistent with reports from other states. And there are signs that the situation has only been getting worse, both locally and nationally. It is clear that the current regulatory structure does not offer sufficient penalties to employers who engage in intentional, egregious, and repeated misclassification of workers. It is therefore vital that policy efforts to reduce misclassification focus on measures that would more fully disincentive employers that engage in willful, flagrant and repeated violation of state labor laws.

Another important policy recommendation to curb many forms of payroll fraud would be to establish joint liability for wage and hour violations. There has been an extraordinary increase in subcontracting over the past few decades, from construction job sites to cleaning services. This has given rise to an employment structure where large companies, developers, and general contractors knowingly hire subcontractors whose business model is predicated on low costs generated by engaging in wage theft and worker misclassification.⁴⁵ Under current statute in Rhode Island, developers and general contractors are absolved of any legal liability when it comes to subcontractors’ violations of state and federal labor law. Until principals are held responsible for the behavior of the subcontractors they employ, no meaningful and systematic change in employment practices is fully possible.

Similar to new laws governing wage theft, other states have already established legislative precedent in establishing joint liability either narrowly in the construction industry or more broadly through the entire economy. For instance, California passed legislation that established joint liability for wage and hour violations—with exceptions for small businesses—across all industries that took effect in 2015.⁴⁶ More recently, New York approved Senate Bill S2766C in 2021, which established joint liability for wage and hour violations in the state’s construction industry.⁴⁷

Finally, the authors’ interviews and prior research make clear that wage theft disproportionately targets immigrant and undocumented workers. Employers effectively prey on these workers’ reluctance to report wage theft to government regulators, thereby allowing it to continue unnoticed and unabated. Unscrupulous employers will continue to use workers’ immigration status against them when deciding whether to pay them on time and in full until there is real immigrant reform at the national level and a pathway to citizenship for the immigrant workers that make up so much of the workforce.