Introduction

Our work defines who we are, how we earn a living, and how we contribute to our community. The basic blocks of employment law are the right to be paid for the work we do in a timely fashion, to have our health and safety protected on the job, and to be eligible for social safety net programs such as workers’ compensation, Social Security, and unemployment insurance when we need them.

Across Rhode Island, however, far too many employers are not playing by the rules, denying workers these basic rights. This is primarily the result of employers illegally misclassifying their workers as independent contractors. This allows them to save approximately one-third of their labor costs by not paying their taxes, not paying into Social Security and unemployment insurance, and not paying legally-required workers’ compensation insurance coverage. While this results in higher profits for these employers, these actions have real consequences: their workers–now considered independent contractors–are denied their legal rights as employees and are left without the most fundamental protections on the job.

In far too many instances, these independent contractors are also the victims of wage theft. Sometimes workers are paid late. Sometimes workers are only paid for a fraction of their hours worked. And sometimes, workers are not paid at all. Wage theft puts workers and their families in the untenable position of being unable to pay rent on time, buy groceries, or afford child care. With many affected workers already struggling to make ends meet, wage theft can push families’ already precarious financial situations over the edge.

While workers bear the primary burden of misclassification and wage theft, the ramifications of these illegal labor practices ripple throughout Rhode Island society. Employers who misclassify and refuse to pay their workers are able to lower their labor costs, thereby making it much harder for legitimate employers who play by the rules to compete. And Rhode Island taxpayers are often left holding the bill. They have to cover revenue shortfalls because these employers evade required taxes and associated costs. And taxpayers have to pay increased social insurance expenses to support the victims of misclassification and wage theft. In sum, these employers are cheating workers, cheating legitimate employers who play by the rules, and cheating Rhode Island taxpayers.

What is Worker Misclassification?

The concept of worker misclassification sounds like a benign technical issue. But as the National Employment Labor Project suggests, "'Independent contractor' and 'employee' are not just labels; the designation has concrete and long-term implications for workers, law-abiding employers, and the public."¹ Our entire worker protection system is based on individuals classified as employees of a firm. Once workers are no longer considered employees but independent contractors, they are cut loose from virtually all those protections.

It is important to note that there have always been legitimate independent contractors. This is the case for many small businesses. They have a particular expertise, bring their employees to a job, and supervise the workers. The presence of legitimate independent contractor firms is not the problem in the state. The problem is unscrupulous employers who continue to have employees but illegally misclassify them as independent contractors to improve their bottom line.

The state of Rhode Island has made it very clear who is and who is not an employee in the state. According to the Joint Task Force on the Underground Economy and Employee Misclassification, an employee is “Anyone performing services for an employer who controls what will be done and how it will be done by the worker. What is important is whether or not the employer has the right to control the details of the services being done." They continue, "Independent contractors have an independent trade, business or profession. Their services are offered to the public. Independent contractors have the right to control the menus and methods of how the work is performed."²

Wage Theft and Worker Misclassification in Rhode Island

There have been a number of high-profile cases of misclassification in Rhode Island, including one at the Commons at Providence Station. Almost in the shadow of the Rhode Island State House, the Commons was a $54.1 million project of Tocci Building Construction. The project received nearly $10 million in state and city tax credit, including $5.5 million in Rebuild Rhone Island tax credits.³ Yet, in 2018, the Rhode Island Department of Labor and Training (DLT) determined that JS Interior Construction–one of the subcontractors Tocci hired for the job–illegally misclassified their drywall workers as independent contractors and paid them far below industry wages. Most of its workers were immigrants already struggling to make ends meet and this loss of wages had a significant impact on them and their families. This should not be the case on such a high-profile construction project underwritten by such massive state and city tax breaks.

The DLT issued a stop-work order, which shut down construction until the employer secured a valid workers’ compensation insurance policy.⁴ The DLT later determined that 29 workers had been illegally misclassified as independent contractors, and the company was forced to make compensatory payments to each of their affected employees and pay a fine of $1,500 for each worker.⁵ But Scott Duhamel, Secretary-Treasurer of the Rhode Island Building and Construction Trades Council, argues that “One of the things that I know to be true too is that, although they did go down there four times, they didn’t catch everybody.”⁶

Michael Sabitoni, business manager of Laborers’ International Union of North America (LIUNA) Local Union 271, saw this egregious behavior as a direct challenge to the state's authority and a reflection of how emboldened employers have become in Rhode Island in terms of misclassification. “We were literally right next door (to the State House)… we’re right here, we’re going to cheat anyway, and we’re going keep doing it even though you keep sending the Department of Labor here.”⁷ He continues, “If you go on a mill [renovation] job, I guarantee you that you will find at least half if not more of those projects are riddled with no workers’ compensation, people not even on the books [being] paid in cash, people misclassified.”⁸

In another high-profile case, the owners of Massachusetts-based Franklin Analytical Services were charged with wage theft after failing to pay $12,000 in prevailing overtime wages to five employees performing asbestos remediation during construction at Barrington Middle School.⁹ According to the Attorney General’s Office, the owners knowingly did not pay their employees for work performed on the weekends. And since this was a public project— covered by prevailing wage law—the owners are also accused of attempting to cover up their crime by filing false certified payroll records with the government.

It is of no surprise that these cases feature multiple forms of payroll fraud: wage theft is often used in combination with other deceptive practices. As another example from July 2020, the owner of M&M Cleaning—which once provided services to the Community College of Rhode Island—was charged with wage theft after he failed to pay $10,855 to 16 of his former employees.¹⁰ In addition to wage theft, the Attorney General also found that the owner had committed Workers’ Compensation Insurance Fraud reporting an income of $10,000 when state tax records revealed an income of $377,311.

In the M&M Cleaning case, the submission of a false insurance form was charged as a felony but refusing to pay workers—which amounts to theft of wages rightfully earned—was only a misdemeanor despite the theft amounting to over $10,000. In Rhode Island, wage theft is always a misdemeanor regardless of the size of the theft. Defining wage theft as a misdemeanor prevents prosecutors from impaneling a grand jury, all but eliminating the Attorney General’s subpoena power to compel testimony and ability to extradite out-of-state violators. This lack of strong investigative powers and the inability to impose real penalties has contributed to the pervasiveness of wage theft, as many employers see the fines and penalties associated with wage theft—if they are ever caught in the first place—as simply the “cost of doing business.”

The Extent and Cost of Payroll Fraud in Rhode Island

To assess the extent and the costs of payroll fraud in Rhode Island, the authors analyze data provided by the Rhode Island Department of Labor and Training in three areas: (a) aggregate outcomes of DLT employee misclassification investigations, (b) the issuances of Stop Work Orders, and (c) the results of employer payroll audits—which seek to identify worker misclassification—as conducted in accordance with the state’s unemployment insurance system. The authors then use these data to make projections about the number of workers misclassified statewide and the costs to workers and Rhode Island taxpayers.

This report offers extensive analysis of worker misclassification, and records from the DLT provide the best quantitative data available to examine this issue. However, data on wage theft is more elusive. Given that much of this occurs in the underground economy—where workers are paid entirely in cash with no paper trail—the lack of any systematic records on the issue makes it practically impossible to make a viable estimate of the extent of explicit wage theft in Rhode Island.