UNDERGROUND ECONOMY

1. UNDERGROUND ECONOMY JOINT TASK FORCE ON THE UNDERGROUND ECONOMY AND EMPLOYEE MISCLASSIFICATION CONFIDENTIAL DRAFT

2. 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. CONFIDENTIAL DRAFT

3. What is Employee Misclassification? Definition: Misclassification occurs when employers treat workers who would otherwise be waged or salaried employees as independent contractors (self-employed) CONFIDENTIAL DRAFT

4. 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 CONFIDENTIAL DRAFT

5. 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 CONFIDENTIAL DRAFT

6. Misclassification • 1099 Delusion • Rise of Independent Contractors • This illegal practice affects: • Workers Compensation Premiums • Unemployment Insurance Costs • Department of Revenue Withholdings CONFIDENTIAL DRAFT

7. 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 CONFIDENTIAL DRAFT

8. 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 CONFIDENTIAL DRAFT

9. 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 CONFIDENTIAL DRAFT

10. Exploitation of Workers • Difficulty Obtaining Unemployment Assistance • Difficulty Obtaining Workers’ Compensation Coverage • Wage and Hour violations • Health and Safety Violations CONFIDENTIAL DRAFT

11. Who Does the Underground Economy Affect? • 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 CONFIDENTIAL DRAFT

12. 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 CONFIDENTIAL DRAFT

13. Effects of the Underground Economy • 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. CONFIDENTIAL DRAFT

14. Effects of the Underground Economy • 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 CONFIDENTIAL DRAFT

15. Underground Economy • 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. CONFIDENTIAL DRAFT

16. Premium Evasion Fraud • 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 CONFIDENTIAL DRAFT

17. What’s Being Done? 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. CONFIDENTIAL DRAFT

18. Coordinating the Effort 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) CONFIDENTIAL DRAFT

19. Coordinating the Effort • 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. CONFIDENTIAL DRAFT

20. Coordinating the Effort • 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) CONFIDENTIAL DRAFT

21. Task Force Goals 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... CONFIDENTIAL DRAFT

22. Task Force Goals • 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. CONFIDENTIAL DRAFT

23. Task Force Goals • 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. CONFIDENTIAL DRAFT

24. Why work together? • 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 CONFIDENTIAL DRAFT

25. What agencies are involved? • 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 CONFIDENTIAL DRAFT

26. Workplace Fraud Community Advisory Panel • Labor • Business • Community Groups CONFIDENTIAL DRAFT

27. Our Objective • 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 CONFIDENTIAL DRAFT