Report of Massachusetts on Underground Economy and Employee Misclassification

Jan 29, 2014News

(BGF)-Executive Office of Labor and Workforce Development of Massachusetts released last year a report on the Underground Economy and Employee Misclassification within the framework of the Joint Enforcement Task Force (JTF) on this issue. Accordingly, the JTF was formed to coordinate Massachusetts’ efforts to eliminate employer fraud and employee misclassification.


Apart from pointing out the activities done by individuals and businesses to “avoid one or more of their employer responsibilities related to wages, payroll taxes, insurance, licensing, safety, or other regulatory requirements”, the report also mentions initiatives and accomplishments of the JTF. We would like to introduce here some important points of the report. The original version can be found at

The Issue in Massachusetts

The “underground economy” is a term that refers to those individuals and businesses that utilize schemes to conceal or misrepresent their employee population to avoid one or more of their employer responsibilities related to wages, payroll taxes, insurance, licensing, safety, or other regulatory requirements. The underground economy also encompasses other activities such as tax evasion, payroll fraud, under-the-table work, and wage theft. These activities may include but are not limited to: paying wages in cash, skimming some or all of the cash takings, not paying overtime, paying sub-minimum wages, charging individuals for transportation or supplies essential to the work, underreporting employees, misclassifying employees as independent contractors, forcing employees to set up shell subcontractor entities, running a part of normal business activities “off-the-books,” not registering a business to avoid tax obligations or to avoid obtaining the necessary licenses and insurance policies. Some unscrupulous employers methodically operate this way as part of their business model; other employers may be unaware of legal complexities with regard to employment laws or feel the economic pressure or incentive to cut corners in their business operations. Whether violating the law knowingly or unknowingly, the lure of more profits, lower costs and less responsibility for workers drives these decisions more frequently. By reducing the amount of money expended for wages, insurance, payroll taxes, licenses, employee benefits, materials and transportation, safety equipment, and safety conditions, these employers can gain a competitive advantage over businesses that comply with business and tax laws and regulations. This results in unfair competition in the marketplace and forces law-abiding businesses to pay greater direct costs to stay in business and indirectly subsidize socialized benefits like health care, unemployment, workers’ compensation, and for those companies and individuals who do not play by the rules.

Individuals who perform work for businesses that do not comply with labor, licensing, and tax laws are negatively affected, often significantly. They are often paid sub-minimum wage, receive no overtime, are denied access to workers’ compensation benefits, Unemployment Insurance (UI) coverage, health care coverage and social security eligibility. Their working conditions may not meet safety requirements, often putting them in danger. Their value is diminished and their ability to economically sustain themselves and their families is put in peril. As a result, other employers and taxpayers are required to indirectly subsidize these liabilities, in the form of workers’ compensation or UI coverage through employer funded trust funds, health care through MassHealth, and other state and federal subsidies.

In addition to the direct negative economic impact to individual workers, these activities also compromise the legitimate business community and the Massachusetts economy. Legitimate businesses are put at an economic disadvantage when competing with other companies who are able to charge less for their work, construction, goods or services because they are not law abiding. Further, legitimate businesses subsidize those entities that do not follow the wage and hour laws, purchase workers’ compensation insurance, or contribute to the UI system, as their dollars are used to provide benefits when there are no employers of record to charge. Taxpayers are also unduly burdened as many workers who are misclassified, paid below minimum wage, or are without employer provided benefits often utilize existing social safety nets. Finally, the sheer number of workers who now fall into the underground economy puts stress on the social safety net and the underlying societal norms that we share.

Massachusetts communities are not immune to the underground economy. Consumers drive the demand for labor, goods, and services, and may unwittingly be contributing to the underground economy through their buying choices. Without realization, consumers may be purchasing goods or contracting for services with entities that are part of the underground economy. In order to increase awareness and to limit the availability of goods and services produced without regard to the wage and hour laws and/or as part of the underground economy, the US DOL has begun to restrict business’ ability to sell these goods through interstate commerce, through what is known as the “Hot Goods” provision under the Fair Labor Standards Act. Massachusetts has been supportive of the US DOL’s efforts and was a major partner in the US DOL’s successful efforts to address this issue in the Commonwealth. Collectively, the costs of the underground economy are high. Operating outside the law allows businesses to have an unfair advantage by illegitimately lowering costs, therefore undercutting their competitors. This takes business away from law-abiding companies and their employees who are trying to make an honest living. This race-to-the-bottom hurts the economy, legitimate businesses, and results in the erosion of the social fabric, economic stability, wage levels and working conditions in the Commonwealth.

JTF Results

The 2012 Annual Report is based on eighteen months of data, broken out between the periods of July 2011 through December 2011, and January 2012 through December 2012.1 During this combined period, member agencies recovered $21,393,652 in wage restitution, state taxes, unemployment contributions from employers, fines, and penalties as a result of referrals and cooperative oversight. Of this total, $5,949,873 was recovered from 07/1/11 – 12/31/11, and $15,443,779 was recovered from 01/01/12 – 12/31/12 (see page 5). Unless otherwise noted, all references to funds recovered represent monies that have been recovered through the cooperative efforts of the JTF and represent monies above and beyond what member agencies collect through their ordinary enforcement efforts.

In its fourth year, the JTF also received 237 complaints through the JTF referral phone line (1-877-96-LABOR), the online referral service (, and complaints made directly to member agencies. The work of the JTF agencies resulted in over 24,000 compliance checks and investigations in the 18 month period, including 17,000 compliance checks in the 2012 calendar year alone.

2012 Accomplishments

During 2012, the JTF had several noteworthy accomplishments:

• The JTF uncovered $1.17 million in unreported wages by subcontractors on the Marriott Copley Place (Host Hotels) renovation project;

• The Department of Unemployment Assistance (DUA) found over 2,300 misclassified workers and $11 million in unreported wages in 3 audits over 5 months;

• The DUA recoveries more than doubled from 2011 to 2012;

• The Alcohol Beverages Control Commission (ABCC) licensing compliance checks reaped millions of recovered funds from applicants seeking liquor licenses;

• The JTF launched a research study on the underground economy and employee misclassification;

• Cross-agency training for partner investigative agencies was provided;

• An automated fraud detection technology system was implemented by the DUA to better compile possible audit targets;

• JTF initiated a more robust compliance check system among agencies.

2013 Goals and Initiatives

During 2013, the JTF looks forward to continued success by focusing on the following goals:

• Implement objectives to achieve the strategic goals set by EOLWD to increase transparency in government as part of Governor Deval Patrick’s MassResults Plan;

• Complete the JTF research study on employee misclassification and the underground economy in Massachusetts;

• Create education and outreach material for businesses and workers;

• Continue to provide and expand cross-agency training opportunities;

• Expand JTF partnerships outside the Executive Branch Agencies;

• Further advance technological capabilities for capturing and tracking referrals;

• Build upon existing channels of multi-state and federal cooperation and maximize future potential cooperation.