Worker Misclassification and Wage Theft in Rhode Island

Russell Ormiston
Associate Professor, Economics Allegheny College President, ICERES

Tom Juravich
Professor, Labor Studies and Sociology University of Massachusetts Amherst

This report offers a quantitative analysis on the extent and economic costs of payroll fraud in Rhode Island, with a particular focus on the misclassification of workers as independent contractors. This study reviews data provided by the Rhode Island Department of Labor and Training (DTL) on (a) aggregate results of DTL employee misclassification investigations, (b) the issuances of Stop Work Orders, and (c) the results of employer payroll audits 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 taxpayers. Based primarily on the results of over 3,000 UI audits of randomly-selected Rhode Island employers completed between 2016 and 2021, the principal findings in this report are:

  • 9.3% of Rhode Island employers are illegally misclassifying workers as independent contractors, a substantial increase from a similar review of UI audits in 2008. This suggests that misclassification is a growing concern in the state. 

  • Rhode Island employers misclassified 4.4% of the state’s workforce, amounting to an estimated 19,359 workers in 2019. Workers misclassified as independent contractors are denied their legal rights to overtime pay, social insurance, and health and safety protections on the job site. 

  • 20.3% of employers fail to fully report their workers’ wages and salaries to the DLT. Misclassifying workers and underreporting wages and salaries allows employers to evade required taxes and contributions to social insurance programs. 

  • An estimated $185.3 million in workers’ wages and salaries was unreported to the DLT in 2019, attributable to both worker misclassification and the failure of firms to fully report the earnings of correctly-classified employees. 

  • Worker misclassification occurs in every industry, but is especially rampant in the construction sector. UI audits reflect that 11.7% of construction employers are misclassifying workers, affecting 8.4% of the industry workforce. 

  • Residential builders and janitorial firms are among the worst violators, as over 30% of their respective industries’ workforces are comprised of misclassified independent contractors. Among subindustries with a sufficient number of audits, others with high rates include landscapers, general freight trucking, and building finishing contractors. 

  • UI audits undercount the full extent of worker misclassification due to the difficulty in proving off-the-books payments to workers and the presence of employers who operate outside of the UI system (e.g., labor brokers). As such, the estimates offered in this report are only lower-bound projections of misclassification and the true values are likely much higher, especially in industries with larger underground economies (e.g., construction). 

  • Separate from UI audits, an investigative team within Wage and Hour Division of the DLT charged 180 companies with misclassifying workers between 2019 and 2021. This led to $1.2 million in assessed payments for back wages, fines and penalties. The construction industry accounted for roughly 70% of these cases. 

  • The Workers’ Compensation Division of the DLT issued 589 Stop Work Orders between 2016 and 2020, reflecting that workers’ compensation insurance fraud is a substantial issue in Rhode Island. Between the DLT and the Workers’ Compensation Court, violating firms were assessed $754,561 in penalties for the lack of coverage. 

  • Payroll fraud is estimated to have cost Rhode Island taxpayers between $25.1 million and $54.4 million in 2019 when applying a series of different assumptions about the full extent of misclassification and off-the-books employment in the state. Cost estimates feature an unavoidable margin of error due to uncertainty about the amount of cash transactions in the underground labor market. 

  • Payroll fraud denied Rhode Island workers at least $5 million in overtime pay in 2019. Further, employers offloaded tens of millions of dollars in Social Security tax obligations (i.e., the “employer” share of FICA) onto the backs of workers that year by misclassifying them as independent contractors and not as employees. 

Based on the authors’ research, potential changes in state labor law offer considerable promise in restoring worker rights and ensuring greater justice in Rhode Island’s workplaces. The first is to make wage theft a felony. While it is difficult to measure wage theft directly in Rhode Island, increases in worker misclassification and off-the-books employment have created a “hot house” for wage theft across the state. Under current state law, wage theft is a misdemeanor no matter the dollar amount. This limits prosecutors’ ability to impanel a grand jury, all but eliminating the Attorney General’s subpoena power to compel testimony and authority to request extradition of out-of-state violators. Considering that many employers see the fines and penalties associated with the crime—if they are ever caught in the first place—as simply “the cost of doing business,” it seems unlikely that any meaningful change in labor practices will occur without upgrading wage theft to a felony.

This study and others across the country have made clear that the current regulatory structure does not provide sufficient penalties to employers who engage in intentional, egregious, and repeated misclassification of workers. In addition to establishing greater disincentive for workers’ direct employers, policymakers should also consider the establishment of joint liability for wage and hour violations. The extraordinary rise in subcontracting—from construction sites to cleaning companies—has given rise to an employment structure in which principals, developers and general contractors knowingly hire subcontractors whose business models are predicated on low costs generated by misclassifying workers and wage theft. Until these larger firms are held responsible for the behavior of their subcontractors, payroll fraud will continue to be standard practice in many industries.