The High Costs of Worker Misclassification

  

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Independent Contractor or Employee? 

This is a common issue employers struggle with and sometimes take their chances on.  But in Massachusetts a wrong answer comes with high costs.  While worker misclassification can be an expensive mistake under Massachusetts law – employers who violate the Massachusetts Wage Act are liable for treble damages and attorneys’ fees – a recent plea deal between the attorney general’s Fair Labor Division and a Massachusetts construction company and its owners illustrate an even greater cost – jail time.  

On January 10, 2012, a Watertown construction company and its owners pleaded guilty in state court to 20 counts related to payroll classification as well as one count of failing to pay workers the prevailing wage.  The company and its owners were charged with failing to disclose millions of dollars in misclassified subcontractor payroll in order to evade payment of workers’ compensation premiums and unemployment insurance taxes. (See Attorney General’s January 10, 2011 Press Release, http://www.mass.gov/ago/news-and-updates/press-releases/2012/2012-01-10-newton-contracting-plea.html). 

One of the owners was sentenced to a two-year prison term (suspended for five years), and ordered to pay $100,000 in restitution to a workers' compensation insurer and $150,000 in fines. The other owner was sentenced to two years of probation and ordered to pay $74,000 in fines.  This is on top of the restitution paid to the Commonwealth’s Division of Unemployment Assistance and to employees for wage violations.  The company and its owners also were barred from bidding on or contracting for public construction projects for five years.

Besides the very severe penalties the employer suffered in this matter, it’s also a good example of how government agencies are collaborating in an effort to stop misclassification of workers – which is considered insurance fraud. 

In the case of the Watertown construction company, complaints were first received by the Massachusetts Joint Enforcement Task Force on the Underground Economy and Employee Misclassification, which audited the company and discovered multiple employees misclassified as independent contractors, meaning the company had failed to disclose to the state more than $2.4 million in misclassified payroll for each quarter from 2006 to 2008.  The Insurance Fraud Bureau was also involved: it determined that the firm misclassified half of its workforce as subcontractors to evade workers' compensation premiums between 2005 and 2009.  And the Attorney General's Fair Labor Division discovered that the company had misclassified employees working on a Suffolk County jail project as laborers, paying them $44.10 per hour, instead of the state prevailing wage for roofers of $53.86.  The company subsequently paid more than $5,000 in restitution to employees.

This sort of collaboration is also occurring on the federal level.  On September 19, 2011, the U.S. Department of Labor entered into an agreement with the Internal Revenue Service to improve departmental efforts to combat worker misclassification.  In addition, labor commissioners and other agency leaders representing seven states – including Massachusetts – agreed to share information and coordinate law enforcement with the U.S. Department of Labor’s Wage and Hour Division and, in some cases, its Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and Office of the Solicitor.

Which raises the question, why is the government going to such lengths to crack down on worker misclassification?  In short, it comes down to revenue.  While misclassification deprives workers of unemployment insurance and workers compensation, it also deprives the state and federal government of tax revenue that it would otherwise receive from payroll taxes.  In addition, as a result of misclassification, the Commonwealth often incurs additional costs, such as providing health care coverage for uninsured workers, providing workers’ compensation benefits paid by the Workers’ Compensation Trust Fund, and unemployment assistance without employer contribution into the Division of Unemployment Assistance fund, among other indirect costs.

The takeaway here: when it comes to properly classifying employees, employers are better safe than incarcerated.

If you have any questions about the information above, please contact Kara M. DelTufo directly or fill out this form and I will contact you.