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Notes
1 Rebecca Smith, “Public Task Forces Take on Employee Misclassification: Best Practices,” National Employment Law Project Policy Brief, August 2020: 2.
2 “What Rhode Island Business Should Know About Worker Misclassification,” https://dlt.ri.gov/regulation-andsafety/worker-misclassification.
3 “Nearly $10 million in Tax Credits yet Tocci Building Corporation' Common at Providence Station Project Still Underpays Workers," Uprise RI, July 3, 2018, https://upriseri.com/2018-07-03-commons-at-providence-station/.
5 “Nearly $10 million in Tax Credits yet Tocci Building Corporation' Common at Providence Station Project Still Underpays Workers," Uprise RI, July 3, 2018, https://upriseri.com/2018-07-03-commons-at-providence-station/.
6 Scott Duhamel, interview by authors, November 23, 2021, 22.
7 Michael Sabitoni, Interview by authors, November 23, 2021, 12.
8 Michael Sabitoni, Interview by authors, November 23, 2021, 5.
9 “Massachusetts Contractors Arraigned on Wage Theft Charges Stemming from Barrington Middle School Construction Work,” https://riag.ri.gov/press-releases/massachusetts-contractors-arraigned-wage-theftcharges-stemming-barrington-middle.
10 “Owner of Cleaning Company Charged with Wage Theft Provided Services to CCRI,” WPRI, July 9, https://www.wpri.com/news/crime/owner-of-cleaning-company-charged-with-wage-theft-provided-services-to-ccri/.
11 The Division of Labor and Training attributes the large decline in SWOs in 2020 to a policy change. Prior to 2020, a Stop Work Order issued a notice of a hearing at the DLT. Starting in 2020, however, the issuance of a SWO effectively shut down the business without a hearing and required them to remain closed until they obtain workers’ compensation insurance coverage in compliance with the law or until they appealed the SWO with the Workers’ Compensation Court.
12 The most recent study of worker misclassification published in 2021 featured a review of Massachusetts state UI audits; for more, see: Juravich, Ormiston and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper. For a review of the additional eight state-specific studies that were published prior to that (MA, ME, IL, NY, MN, MI, IN, VA), see: Ormiston, Belman and Erlich (2020). “An Empirical Methodology to Estimate the Incidence and Costs of Payroll Fraud in the Construction Industry,” Institute for Construction Economics Research Working Paper, http://iceres.org/wpcontent/uploads/2020/06/ICERES-Methodology-for-Wage-and-Tax-Fraud.pdf.
13 A targeted audit is pursued as the result of information coming from a variety of sources. Most directly, current or former employees of a business—or any other interested party (e.g., relatives, business competitors)—may file a complaint with the DLT alleging misclassification. In addition to tips, UI audits may result from a referral made by another state agency or after an employee attempts to claim UI benefits despite the fact that the employer does not report any wages to the state. To assist reporting of employee misclassification, the DLT has published a public form that can trigger an audit or investigation: https://dlt.ri.gov/sites/g/files/xkgbur571/files/documents/pdf/MisclassForm.pdf.
14 Statewide employment and wage estimates were generated by extrapolating the results of UI audits to the private-sector employment (424,358 employees) and wage and salary ($22.46 billion) totals for the state in 2019 according to the Rhode Island Office of Labor Market Information. As an example, UI audit results reflected a ratio of $121 in legal wages and salaries for every $1 underreported to the DLT; applying this ratio to the $22.46 billion in legal wages results in an estimate of $185.3 million in underreported wages and salaries. While the industry composition of random UI audits are not an exact match to the industrial composition of all employers in Rhode Island, a comparison of two-digit industry codes (North American Industrial Classification System) between the two sources did not reveal substantial differences that would negate the use of this economy-wide average; further, stratifying the sample by two-digit codes would encounter substantial risks of sampling error given the small number of audits in the least-populated industries in the state. As a result, statewide averages in this study rely on the application of the overall rates determined by UI audits. For statewide data used in this report, see: https://dlt.ri.gov/labor-marketinformation/data-center/employment-wages-industry-qcew.
15 Estimates were calculated for 2019 given the pandemic-fueled irregularities in the 2020 labor market and the fact that 2021 data on the broader labor market had yet to have been published by either the Bureau of Labor Statistics or the Rhode Island LMI by the time of the writing of this report in January 2022.
16 There are many reasons to believe that the estimated number of misclassified workers in the state represents an underestimate of the true total, some of which are outlined later in the study. However, there is one reason why this might also overstate the problem: given that many (but not all) misclassified workers are short-term employees, it is possible that they are bouncing from employer to employer and would thus be double-counted if detected and deemed to be misclassified in multiple locations in the same time period.
17 As examples of the extremes that New England construction employers will engage to avoid detection, consider Chapter 1 of: Juravich, Ormiston and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
18 Author’s e-mail exchange with a DLT official, January 24, 2022.
19 For more, see: Juravich, Ormiston and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
20 The simple addition of firms subject to targeted audits would result in an overestimation of misclassification if random audits reflected a sample of firms consistent with the underlying population of firms and audits captured the full extent of illegal labor practices in Rhode Island. However, given the difficulties in capturing cash-only payments and the presence of unregistered employers (e.g., construction labor brokers), there are reasons to suspect that the “all audit” total may possibly—if not likely—still represent an undercount of the full extent of illegal employment practices in the state. As evidence of this likelihood, the authors used data from the U.S. Census and Bureau of Labor Statistics to indirectly estimate the number of misclassified construction workers in Massachusetts; this number far surpassed what was identified in the “all audit” total on UI audits. For more, see Appendix A of: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts: Appendices,” University of Massachusetts Labor Center Working Paper, https://www.umass.edu/lrrc/sites/default/files/Appendix%20-%20Massachusetts%20Construction%20Report.pdf.
21 The 2009 report does differentiate as to whether the results were for random audits only or represented the “all audits” total, clouding any direct comparison. Further, the 2009 report also lists that 4.3% of Rhode Island employees were affected by misclassification by misclassification, compared to 4.4%-7.3% in this study. However, a direct comparison to this work is complicated by the fact that many similar studies at the time calculated the proportion of the workforce affected by simply dividing the number of misclassified workers by the number of legal employees. In contrast, this study divides the number of misclassified workers by the sum of legal employment and misclassified workers, which is a more accurate depiction of the proportion of the workforce affected. For more, see: Special Joint Commission to Study the Underground Economy and Employee Misclassification (June, 2009). Findings and Recommendations to the Rhode Island General Assembly.
22 An evolving statistical approach involves comparing the number of self-identifying construction workers on Census surveys of American households with official payroll records submitted by employers that are aggregated by the Bureau of Labor Statistics; it is presumed that a significant portion of the difference between the number of workers in the industry and the number of legitimate employees claimed by construction business represents a viable proxy for the number of misclassified and off-the-books workers in the industry. In engaging this approach for the Rhode Island construction sector using data from the American Community Survey (ACS) and the Quarterly Census for Employment and Wages (QCEW), the authors found there to be a substantial gap between total industry employment as identified by workers and legal employment as documented by employers in the state at a number that far surpassed the estimates provided in Table 4. However, estimates of construction employment in Rhode Island taken from the ACS feature a substantial margin of error (presumably due to the small size of the state), undermining the authors’ confidence in providing a specific estimate of the number of misclassified construction workers in the state using this statistical approach. For a full discussion of the complications comparing the ACS to the QCEW to estimate the level of payroll fraud in the construction industry, see Appendix A of: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts: Appendices,” University of Massachusetts Labor Center Working Paper. See also: Ormiston, Belman and Erlich (2020). “An Empirical Methodology to Estimate the Incidence and Costs of Payroll Fraud in the Construction Industry,” Institute for Construction Economics Research Working Paper.
23 Among industries that featured between 50 and 100 audits, it is important to highlight that rates of employee misclassification in two other industries were quite high: transportation and warehousing (71 audits) and real estate and rental leasing (90 audits). In the former, 18.3% of the industry workforce was estimated to be misclassified on all audits (but just 7.5% on random audits); in the latter, it was 20.1% on all audits and 15.5% on random audits.
24 Across all audits (both random and targeted), the authors identify that 5.2% of employers throughout the Rhode Island economy were found to have more misclassified workers than regular employees. Within the administrative and waste management services industry, the audits reflected a rate of 10.0%; construction was not far behind at 9.3%. No other industry featured a rate above the state average. While numbers were lower when restricting the sample to random audits (3.2%), these two industries still far outpaced every other industry (administrative and waste management services=8.3%; construction=4.7%). Similar trends emerged when looking at extensive wage underreporting (more than $100,000) and those that both misclassified a large number of workers and underreported a significant amount of money.
25 For more, see: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper; Juravich (2020). “Wage Theft at the North Square Apartments,” University of Massachusetts Labor Center Working Paper; and Juravich, Ablavsky, and Williams (2015). “The Epidemic of Wage Theft in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
26 For more, see: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
27 For a comprehensive perspective on the public costs of worker misclassification, see: National Employment Law Project (2020). “Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries,” accessed at: https://www.nelp.org/publication/independent-contractormisclassification-imposes-huge-costs-workers-federal-state-treasuries-update-october-2020/.
28 For more, see: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
29 Among many studies that have addressed this issue, see as an example: Ohio Attorney General (2009). “Report of the Ohio Attorney General on the Economic Impact of Misclassified Workers for State and Local Governments in Ohio,” accessed at: https://iiiffc.org/images/pdf/employee_classification/OH%20AG%20Rpt%20on%20Misclass.Workers.2009. pdf.
30 The estimate of overtime and premium pay lost is derived using the National Compensation Survey produced by the Bureau of Labor Statistics. In 2019, the average worker earned $25.22 per hour with an additional $0.28 in overtime and premium pay; this ratio was used to assess lost overtime pay amongst Rhode Island workers. But these national averages go across all industries, including those predominantly featuring workers “exempt” from receiving overtime via the Fair Labor Standards Act. But many misclassified workers are located in industries largely populated by “non-exempt” workers, meaning that their rate of overtime-to-regular pay is likely much higher. For data on the NCS, see: https://www.bls.gov/web/ecec/ececqrtn.pdf.
31 Estimated losses for the state UI program are estimated by using the ratio of UI contributions required to be repaid by misclassifying employers to the total volume of wages underreported on UI audit data.
32 Projections for unpaid workers’ compensation insurance premiums are derived from the state-average “loss costs” on workers’ compensation policies in Rhode Island, a value graciously provided to the authors by a representative at the National Council on Compensation Insurance. Loss costs, however, represent only the costs necessary for insurance companies to cover claims and do not equate to the actual cost of a premium paid by employers (which would also include an additional markup by insurance companies). Further, the overall state average loss costs includes many “white collar” occupations that are relatively safe and feature far lower rates of worker misclassification; in contrast, many of the industries with the highest rates of misclassification (construction, landscaping) are also likely to feature higher-priced workers’ compensation coverage. This would suggest that the overall state average is likely a substantial underestimate of the true price of coverage foregone by employers engaged in misclassification.
33 A 2021 study by Juravich, Ormiston, and Belman reviewed 1099-MISCs issued by Massachusetts contractors to state residents. Many of these were issued to Social Security numbers that did not appear in state income tax records for the year, meaning that a substantial portion (32%) of the dollars paid in 1099- MISCs were not reported. In contrast, a 2016 report published by the Internal Revenue Service estimated that the net misreporting percentage on nonfarm proprietor’s income to be 64%, a number that included a mix of unreported income from 1099-MISC forms and income earned entirely off-the-books. Since the authors have no evidence suggesting that underreported wages to the Rhode Island DLT are the result of solely 1099- MISCs or also includes discovered off-the-books payments, the results are presented with both assumptions. For more, see: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper; Internal Revenue Service. 2016. “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2008-2010.” IRS Publication 1415.
34 A lack of information on the demographics and income situation of workers complicates the ability to estimate projected tax losses. UI audit reflect that the average instance of worker misclassification— represented by the simple average of wages underreported divided by the number of workers misclassified— would be nearly equal to the standard deduction for single people on Rhode Island’s income tax forms in 2019 ($8,772 vs. $8,750). But it is unrealistic to think that this is workers’ only source of income, suggesting that some portion—if not all of it—would be subject to income tax; incorporating the number of exemptions is also a complicating factor. As a result, the analysis simply applies the marginal tax rate (3.75%) on every dollar given the tax bracket for those earning between $0 and $64,000 to each dollar estimated to be underreported (Source: Loughead, Katherine (2021). “State Individual Income Tax Rates and Brackets for 2021,” Tax Foundation; accessed at: https://taxfoundation.org/publications/state-individual-income-taxrates-and-brackets/.
35 For the cost estimates of misclassification in the 2009 report submitted to the Rhode Island General Assembly, see pages 46 and 47 of: Special Joint Commission to Study the Underground Economy and Employee Misclassification (June, 2009). Findings and Recommendations to the Rhode Island General Assembly. For prior studies using this statistical approach, see Ormiston, Belman and Erlich (2020). “An Empirical Methodology to Estimate the Incidence and Costs of Payroll Fraud in the Construction Industry,” Institute for Construction Economics Research Working Paper; Duncan, Waddoups and Ormiston (2021). “Payroll Fraud in Nevada’s Construction Industry: Extent and Fiscal Impact,” Institute for Construction Economics Research Working Paper; Ormiston, Erlich and Belman (2021). “Payroll Fraud in New York’s Construction Industry: Estimating its Prevalence, Severity and Economic Costs,” Institute for Construction Economics Research Worker Paper; Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
36 The Bureau of Labor Statistics Occupational Employment Statistics series puts $27,400 between the 10th and 25th percentile of Rhode Island workers’ annual wages in 2019. This value is also between the 25th percentile and the median of what housekeepers and janitors earn in the legitimate Rhode Island economy. While many misclassified workers may be paid less than this amount, there is a counterbalance in that some misclassified construction workers can make much more than this value. For instance, $27,400 is far below the 10th percentile of earnings of legitimate carpenters in Rhode Island, and roughly equates to the 10th percentile of contraction laborers who receive W-2s. For more, see: www.bls.gov/oes. Data from the American Community Survey comes from IPUMS USA, University of Minnesota, ipums.org.
37 To calculate uncollected income tax, the authors multiplied the missing earnings by the marginal tax rate for lower-income workers (3.75%) in 2019. A more complex approach—which would have subtracted workers’ standard deduction and exemptions—was scrapped when data from the American Community Survey revealed that most self-employed workers in unincorporated businesses (which best categorize misclassified workers as a whole) have other sources of income (spousal, other work, investments) that would more than offset the standard deduction and exemptions.
38 See page 46 of: Special Joint Commission to Study the Underground Economy and Employee Misclassification (June, 2009). Findings and Recommendations to the Rhode Island General Assembly.
39 The 2009 report to the General Assembly assumed that misclassified workers earned the state-average income; in 2019, the Bureau of Labor Statistics Occupational Employment Statistics (www.bls.gov/oes) series denoted this to be $57,220. Further, it appears that the Workers’ Compensation Court was using the all-audit total of employment which, at the time, was 6.1% of employment. For more, see: Special Joint Commission to Study the Underground Economy and Employee Misclassification (June, 2009). Findings and Recommendations to the Rhode Island General Assembly.
40 For more, see: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper; Juravich (2020). “Wage Theft at the North Square Apartments,” University of Massachusetts Labor Center Working Paper; and Juravich, Ablavsky, and Williams (2015). “The Epidemic of Wage Theft in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
41 See: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
42 For more, see: Minnesota Department of Labor and Industry. “Summary of Minnesota’s New Wage Theft Law.” Accessed at: https://www.dli.mn.gov/sites/default/files/pdf/wage_theft_law_summary.pdf.
43 For more, see a summary of Colorado HB19-1267 here: https://leg.colorado.gov/bills/hb19-1267.
44 For more, see California Assembly Bill No. 1003 here: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB1003.
45 For more, see: Juravich, Ormiston, and Belman (2021). “The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper; Juravich (2020). “Wage Theft at the North Square Apartments,” University of Massachusetts Labor Center Working Paper; and Juravich, Ablavsky, and Williams (2015). “The Epidemic of Wage Theft in Residential Construction in Massachusetts,” University of Massachusetts Labor Center Working Paper.
46 See: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB§ionNum=2810.3.
47 See: https://legislation.nysenate.gov/pdf/bills/2021/A3350A.