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UNDERGROUND ECONOMY. JOINT TASK FORCE ON THE UNDERGROUND ECONOMY AND EMPLOYEE MISCLASSIFICATION. WHAT IS THE UNDERGROUND ECONOMY?. Individuals and businesses that : Willfully avoid labor, licensing and tax laws, Deal in cash and/or other “off the books” schemes

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Underground economy l.jpg

UNDERGROUND ECONOMY

JOINT TASK FORCE ON THE UNDERGROUND ECONOMY AND EMPLOYEE MISCLASSIFICATION

CONFIDENTIAL DRAFT


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WHAT IS THE UNDERGROUND ECONOMY?

  • Individuals and businesses that:

    • Willfully avoid labor, licensing and tax laws,

    • Deal in cash and/or other “off the books” schemes

    • Engage in misclassification of employees:

      • to conceal their activities and their true tax liability from licensing, regulatory and tax agencies.

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What is Employee Misclassification?

Definition:

Misclassification occurs when employers treat workers who would otherwise be waged or salaried employees as independent contractors (self-employed)

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THE LAW M.G.L. c.149 s.148B

  • The three prong or “A, B, C” Test

  • The burden of proof is on the employer

  • To be classified as an independent contractor one must meet all three tests

    • Freedom from control

    • Service outside the normal course of business

    • Independent Trade, Occupation, Profession or business

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Indications of Misclassification

  • Individuals services not reflected in business records

  • Individuals providing services paid in cash provide no documents reflecting payments

  • Insufficient or no workers’ compensation coverage exists

  • Individuals not provided 1099s or W-2s

  • Contracting entity provides tools, equipment and supplies or requires purchase from contracting entity

  • Alleged independent contractors pay no income taxes or employer contributions to Division on Unemployment Assistance

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Misclassification

  • 1099 Delusion

    • Rise of Independent Contractors

    • This illegal practice affects:

      • Workers Compensation Premiums

      • Unemployment Insurance Costs

      • Department of Revenue Withholdings

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The Problem - Misclassification of Workers & off the books schemes

  • Uncollected payroll, sales & excise taxes

  • Unpaid Workers’ Compensation Premiums

    • Premium Fraud against insurers & Department of Industrial Accidents

    • Workers’ Compensation laws violated

  • Unpaid Unemployment Insurance

    • Displaced workers find difficulty filing unemployment insurance claims

    • Uncounted workers & job vacancies

    • Unemployment Insurance laws violated

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The Problem- Misclassification of Workers & Off-The-Books Schemes

  • Unfair Business Competition

  • Unregulated & unsafe products & services

    • Consumers endangered when contracting with unlicensed & unregulated businesses

  • Unprotected worker health & safety

  • Lawful wages not paid

    • Minimum wage laws violated

    • Prevailing wage laws violated

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Emergence of Labor Which Prevents Equity in all Manner of Industry

  • Temporary Worker Agencies

  • Imported short term workers

  • Reliance on cheap off the books workers

    • Domestics

    • Hospitality

    • Landscaping

    • Construction

    • Janitorial Services

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Exploitation of Workers Industry

  • Difficulty Obtaining Unemployment Assistance

  • Difficulty Obtaining Workers’ Compensation Coverage

  • Wage and Hour violations

  • Health and Safety Violations

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Who Does the Underground Economy Affect? Industry

  • The Commonwealth’s Tax Payers

  • The workers who are exploited.

  • Responsible employersand their workers

    • Wages are depressed

    • Responsible employers are unable to compete

    • Undermines competitive bidding process

    • Legitimate employers unable to sustain sufficient profits are faced with a choice to break the law or cease doing business

  • Consumers of potentially unregulated and unsafe goods & services

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How Does the Underground Economy affect Government & Business?

  • From 2001-03-at least 1 in 7 workers (14%) of MA construction workers misclassified as independent contractors

  • Estimated $12.6M to $35M uncollected UI taxes

  • Estimated $91M uncollected income tax

  • Estimated $91M in unpaid workers’ compensation premiums

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Effects of the Underground Economy Business?

  • Exploits vulnerable workers and deprives them of legal benefits and protections.

  • Gives unlawful businesses an unfair competitive advantage over lawful businesses by illegally driving down violators' taxes, wages, and other overhead costs.

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Effects of the Underground Economy Business?

  • Defrauds the government of substantial tax revenues; and

  • Harms consumers who suffer at the hands of unlicensed businesses that fail to maintain minimum levels of skills and knowledge

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Underground Economy Business?

  • 2005 Bear Stearns Reports that 4 to 6 Million jobs have migrated into the Underground Economy

  • Thousands of MA jobs have migrated to the Underground Economy

    • Expansion of day laborer employers

    • Street corner hiring halls

    • It is estimated that 1 out of every 7 jobs, in the construction industry alone, has migrated to the Underground Economy in recent years.

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Premium Evasion Fraud Business?

  • Janitorial Company has “franchisees” instead of employees

  • Environmental Compliance Training (ETC)

    • Fraudulently issued asbestos abatement certificates

    • Temp Agency under-the-table payroll scheme

    • Over $1M tax & insurance not paid

  • Five charged in $43M under-the-table Payroll Fraud

    • Owned and operated temp agency under six different names to avoid lawful taxes & business expenses

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What’s Being Done? Business?

Enforcement/Investigation to date:

  • Creation of Joint Task Force on the Underground Economy and Employee Misclassification. (Executive order # 499)

  • JTFUE currently investigating over 40 cases of Employer Fraud.

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Coordinating the Effort Business?

1) Research & Targeting:

Objective-To develop leads for the task force. Investigators from each agency are needed to participate in weekly meeting to review internal leads and also those coming for the tip line & website. (1-877-96-LABOR)

2) Sweeps Teams:

Objective-To plan and execute coordinated on site inspections and visits (sweeps)

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Coordinating the Effort Business?

  • Audit/Investigations Teams:

    Objective-to plan and execute follow up audits and investigations on any non-compliance found in the course of the sweeps conducted

  • Legal Teams:

    Objective-To address legal issues arising in connection with the implementation of the Executive Order and the Memorandum of Understanding between task force members.

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Coordinating the Effort Business?

  • Communication Team:

    Objective-To develop strategies focused on keeping the public informed of task force activities, to develop multi-lingual documents for sweeps, and to assist in providing avenues for the public to contact the task force with tips and complaints.

  • Reporting Team:

    Objective-To coordinate and develop the Report to the Governor required by the Executive Order.

    • Sub Committee on information Sharing. What can & can’t be shared (Legally Speaking)

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Task Force Goals Business?

Purpose of Task Force:

  • Eliminate unfair business competition; level the playing field so that legitimate businesses can compete in a fair market.

  • Protect workers by ensuring they receive all the benefits and protections due to them under the law; benefits, WC, UA, safety, etc...

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Task Force Goals Business?

  • Protect the consumer by ensuring that businesses are properly licensed and adhere to consumer protection regulations. Ensuring that consumers get a good product, reduction of the burden on consumers as a result of those who avoid paying income tax, insurance premiums, and worker compensation premiums.

  • Reduce the burden on law abiding citizens and businesses by ensuring that ALL businesses and individuals comply with the Commonwealth’s licensing, regulatory, and tax laws.

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Task Force Goals Business?

  • Increase compliance with the Commonwealth’s tax law in order to maximize (recapture) lost revenue.

  • Continually evaluate and improve the effectiveness of the task force, through new regulations and legislation.

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Why work together? Business?

  • It is effective; it allows participating agencies to address multiple, rather than singular violations of the law

  • NY, NJ, FL & other states on the way

  • California’s Economic & Employment Enforcement Coalition in FY2007 has:

    • Identified $92M unreported wages

    • Collected $14M unreported taxes

    • Collected $13M in fines

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What agencies are involved? Business?

  • Department of Labor

    • Division of Occupational Safety

    • Department of Industrial Accidents

    • Division of Apprenticeship Training

    • Office of the Attorney General

    • Department of Revenue

    • Department of Unemployment Insurance

    • Insurance Fraud Bureau

    • Division of Professional Licensure

    • Department of Public Safety

    • Division of Capitol & Asset Management

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Workplace Fraud Community Advisory Panel Business?

  • Labor

  • Business

  • Community Groups

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Our Objective Business?

  • Eliminate unfair business competition

  • Protect workers by ensuring that they receive all benefits & protections due to them under the law

  • Protect the consumer by ensuring that businesses are properly licensed & adhere to consumer protection regulations

  • Reduce the burden on law-abiding citizens & businesses by ensuring that all businesses & individuals comply with the Commonwealth’s licensing, regulatory & tax laws

  • Increase compliance with the Commonwealth’s tax laws to maximize revenue

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