The Social and Economic Costs of Illegal Misclassification, Wage Theft and Tax Fraud in Residential Construction in Massachusetts

Tom Juravich, Russell Ormiston, Dale Belman 

Executive Summary 

This study examines labor and employment practices in the residential construction industry in Massachusetts. Our research is based on more than 60 in-depth interviews with documented and undocumented workers, union and non-union contractors, union and public officials, and community activists involved in residential construction. The results of these interviews are complemented by a comprehensive quantitative analysis of data from the Massachusetts Department of Revenue, Department of Unemployment Assistance and Department of Industrial Accidents that provides statistical projections of the extent and economic costs of worker misclassification in Massachusetts construction. 

Based on our extensive interviews, we have identified a new and fully institutionalized business model operating in residential construction across the Commonwealth. Practices such as the illegal misclassification of workers as independent contractors, wage theft and tax fraud, and paying workers in cash that were once at the margins of the construction industry, are now at the center of medium and large residential construction in Massachusetts. We have identified four dimensions of this new business model: 

  • The majority of builders in residential construction have almost completely jettisoned regularized employees in residential construction. However, upon closer inspection, the vast majority of these workers in non-union construction, under current law in the Commonwealth, should be classified as employees. The lack of regular employment in legitimate businesses creates the conditions for the hyper-exploitation of precarious and mostly undocumented workers. 
  • This reliance on illegally misclassified workers has been greatly facilitated by the emergence of a new labor intermediary: labor brokers, who supply the vast majority of mostly undocumented workers for jobs in residential construction. Without corporate identities, they operate largely in the shadows and are nearly untraceable in that they pay their workers in cash and do not keep any records of employment. This cash-only world is a hothouse for wage theft, a central feature of this business model. For example, on a Beacon Communities project in Amherst, MA nine drywallers working for a labor broker received no payment for five six-day weeks averaging 10-hours a day and were owed collectively $50,713. 
  • Workers in residential construction are pushed to work incredibly hard in precarious working conditions and as cash workers, are not covered by workers’ compensation and have no access to the social and economic benefits normally obtained through employers. Hanging drywall—already a dangerous occupation—has become intensely unsafe because of the primitive working conditions under which most of these workers toil. Workers are encouraged not to report on-the-job accidents and, if they are injured, neither labor brokers nor any other entity are held responsible; their medical costs often end up being paid for by the Commonwealth and its taxpayers. 
  • These practices are not restricted to the margins of residential construction. Major developers and general contractors who allow wage theft and tax fraud on their construction projects are fully aware of these illegal, unethical, and predatory practices in the construction process, yet they choose to utilize them anyway and profit greatly. They sign contracts with contractors and sub-contractors knowing full well that they can only be completed at the contract price if workers are illegally misclassified, hyper-exploited to work in unsafe conditions, or have their wages regularly stolen from them. 
  • These practices are likewise extraordinary harmful to legitimate contractors. Since a contractor can save up to 30% of costs by committing wage theft and tax fraud, legitimate contractors playing by the rules cannot effectively compete. 

Audits of employer payrolls from 2017 through 2019 provided by the Department of Unemployment Assistance provide direct evidence of illegality in the industry. In addition, we utilize a well-established empirical approach of indirectly estimating the full extent of misclassification using data from the Census and Bureau of Labor Statistics. We found that: 

  • Employer payroll audits conducted by the DUA between 2017 and 2109 indicate that more than one in six Massachusetts construction employers (16.8% to 17.9%) misclassify workers as independent contractors. 
  • Our indirect method assessing the full extent of misclassification and off-the-books employment in the Commonwealth’s construction sector projects that there were between 22,146 and 36,719 workers affected by wage and tax fraud in 2019, accounting for 9.5% to 15.8% of the industry’s workforce. 

Data from DUA and the Department of Revenue (DOR) indicate widespread misclassification of employees in residential construction and specifically in the finishing trades.

  • Employer audits conducted by the DUA reveal that misclassification is especially prevalent among building finishing contractors (e.g., drywall, finish carpentry, painting), with 26.6% of audited firms engaging in misclassification between 2017 and 2019. 
  • Tax records on sole proprietorships from the DOR reflect alarming rates of contract labor usage in siding, framing, finish carpentry, painting, drywall, flooring and roofing. For example, framing contractors reported $189 in contract labor costs for every $100 of employee wages in 2019. In contrast, electrical contractors spent just $13 in contract labor for every $100 of wages. 
  • DUA audits show that residential builders have some of the highest rates of misclassification in the industry. DOR data on sole proprietorships also reflect that residential builders have some of the highest rates of contract labor usage in the sector ($180 in contract labor for every $100 in wages in 2019). 

Wage theft, tax fraud, cash payment and misclassification are central to this new business model in residential construction and have significant economic costs to both workers and taxpayers in Massachusetts. 

  • We project that misclassification in the Massachusetts construction industry led to a $24.5 million to $40.6 million shortfall in the state’s unemployment insurance fund in 2019. 
  • Contractors evaded between $37.0 million and $78.3 million in workers’ compensation insurance premiums and shortchanged workers by not paying between $19.3 million to $40.8 million in required overtime premiums in 2019. 
  • Our interviews suggested that many employers did not carry a valid workers’ compensation insurance policy. This is confirmed by reports from the Department of Industrial Accidents that indicate that the construction industry accounted for 47.3% of Workers’ Compensation Trust Fund cases— a public fund that covers workers whose employers failed to purchase coverage—from 2016 to 2020 despite representing only 9.4% of claims made through the coverage of law-abiding employers. 
  •  Because of companies’ failure to withhold state payroll taxes, we project that the Commonwealth lost between $6.7 million to $41.3 million in personal income taxes in 2019. Estimates of income tax losses were generated using very conservative assumptions and, especially at the low end, are likely to undercount the amount of income tax losses to the state. 

Our baseline estimates suggest that worker misclassification and off-the-books employment allowed Massachusetts construction employers to reduce labor costs by at least $140.4 million in 2019. This likely undercounts the true social harm to workers and taxpayers. In addition to using conservative assumptions in building our models, our analysis is restricted to areas in which there is sufficient empirical data to defensibly quantify the issue. Given that data availability is limited when studying the underground economy, our total does not include statewide estimates of direct wage theft (explicit non-payment for work), business tax revenue shortfalls attributable to non-filing by labor brokers, medical costs on unreported workplace injuries, and a host of other direct and indirect effects that were reported in our interviews. As a result, the true social and economic costs of worker misclassification are likely an unknown multiple of the totals offered in this study. 

It is very clear that current state laws, regulatory structures and the level of public resources allocated to monitoring and enforcement has been unable to curb illegal misclassification of workers, cash payments, wage theft and tax fraud and a variety of illegal and unethical activities in residential construction. The egregious conditions we have documented on jobsites across the Commonwealth and the hyper-exploitation of undocumented workers have no place in Massachusetts. The Commonwealth has a responsibility to ensure that its laws are followed in the construction industry and that workers are not routinely asked to perform unsafe work, cheated out of their wages, or forgo access to the economic benefits enjoyed by workers classified as employees. We have identified four areas where changes need to be made: 

  • It is imperative that the Commonwealth review and revise its current laws and also invest significantly in monitoring and enforcement. The Massachusetts construction industry is a $22 billion sector featuring over 174,489 employees and many other workers not directly employed. Despite the enormity of the industry and its critical place in the state’s economy, neither the laws nor the enforcement of them is sufficient. 
  • More state resources should be allocated to addressing wage theft and tax fraud in the Commonwealth. Increased monitoring and enforcement will not only protect the most vulnerable workers toiling in the shadows, but it will generate additional tax revenues beyond the costs of more vigorous monitoring and enforcement. 
  • There needs to be penalties assessed against companies and individuals found to have committed wage theft and tax fraud that actually deter the illegal behavior. Further there needs to be effective enforcement of these penalties since at the present time, many companies and individuals adjudicated to have violated the law essentially ignore their obligations and disappear or otherwise fail to pay what has been ordered. 
  • The Administration should reinvigorate the Council on the Underground Economy (CUE) and require the Secretary of Labor and Workforce Development to fulfill the statutory mandate of the CUE. As of this date, the CUE has only held one meeting in six years under this Administration does not regularly act and has not issued an annual report past 2018. All state agency members of the CUE should similarly be required to fulfill their statutory obligations under the CUE. 
  • In order to stem wage theft and the illegal misclassification of workers developers, general and sub-contractors must be held fully responsible for what happens on their job sites. Until we hold developers responsible for the illegal activity that occurs on their projects, the egregious wage theft we saw in Amherst will continue. We need to develop joint liability laws and successor policies that holds developers and general contractors accountable for the behavior and actions of contractors, subcontractor and labor brokers. A number of other states, including California, have passed or are considering this kind of up-the-chain legislation and Massachusetts needs to adopt this legislation to hold developers, contractors and subcontractors liable for the illegal behavior of those they have contracted with. Such action is critical to address the abuses we have documented and to restore fairness and integrity to residential construction.
    • The Commonwealth needs to recognize the important roles that worker centers, community organizations and unions can play in gathering information and education and should encourage these stakeholders to participate as intermediaries in combating illegal misclassification and wage theft. This model already exists in other states and municipalities throughout the country and can be readily adopted in Massachusetts. 

No serious effort at restoring fairness and integrity in residential construction is possible without the regulation of labor brokers. The Commonwealth of Massachusetts needs to establish a system for both licensing and regulating labor brokers. The licensing process should begin by requiring all labor brokers to register with the Secretary of State, as we expect firms from other industries in the Commonwealth to do. Second, there needs to be an establishment of the Bill of Rights for those workers recruited and paid by labor brokers. Finally, licensure and oversight of labor brokers must prohibit the use of cash payments that are not in compliance with their legal obligations. 

Immigration reform will also be necessary to restore fairness and integrity in the residential construction industry. Without immigration reform, unscrupulous companies and individuals will continue to use workers’ immigration status against them forcing them to work long hours and to undertake work while frequently underpaying them or not paying them at all.