Home > Case Histories, Field Audits, Industry Issues, Prime Contractor Liability, Workmens Compensation > State Ups Scrutiny On ‘Underground Economy’

State Ups Scrutiny On ‘Underground Economy’

By Brandon Butler Worcester Business Journal Staff Writer

January 2, 2011

On July 1 Richard Power got a surprise visit from two state investigators, who whipped out their badges and asked Power, owner of Worcester-based Commonwealth Environmental Services, to show proof of his worker’s compensation insurance.

Power, a former member of the U.S. Air National Guard, always tries to keep his business paperwork up to date, including worker’s comp, unemployment insurance and businesses taxes.

But there had been a mistake: Power’s worker’s comp policy had expired, unbeknownst to him.

The state investigators ordered Power to immediately stop working until he could show proof of insurance. Within a week Power obtained a new policy and he was able to go back to work.

He had to pay a $900 fine and was barred from bidding on any public projects for one year.

Situations like the one Power found himself in have become increasingly more common in the last year as the state has ramped up enforcement of the so-called “underground economy.”

The label describes businesses that, for whatever reason, are not up to date on mandatory businesses expenses or have misclassified employees as contractors. Doing so allows businesses to save significant costs related to insurance and benefits. State officials claim that some businesses do it purposely to save a buck. But many business owners claim, like Power, that it’s all an honest mistake.

Whatever the reason, the state is finding these businesses and has increased fines against companies by more than fourfold in the last year.

Enforcing Fairness

In March 2008, Gov. Deval Patrick signed Executive Order No. 499, which established the Joint Enforcement Task Force on the Underground Economy and Employee Misclassification (JTF). The program combines resources from more than a half-dozen state agencies.

In 2009, the first full year of the program, the task force collected $1.4 million in revenues through fines. But 2010 proved to be a banner year with the state collection nearly $6.5 million, including more than $2 million in fines levied against businesses with lapsed policies or no unemployment insurance at all.

For the thousands of businesses that have been cited by the task force, getting caught by the JTF means anywhere from a $100 fine up to tens of thousands of dollars in penalties and possible probation.

While some businesses say the issue is a simple oversight in paperwork, state officials say other businesses appear to have purposely skipped on paying employee costs in an effort to boost their bottom line and to gain an edge on companies that are complying with the laws.

“If there’s one word to describe what we’re doing, it’s ‘fairness,’ ” said George Noel, the state’s director of Labor and chair of the JTF. “It’s fairness for employers, for the employees, for the consumers and the taxpayers. We’re trying to make sure that everyone is on a level playing field, because the people that are playing by the rules end up subsidizing the ones that aren’t, and that’s just not fair.”

Ulterior Motives

While state officials insist that the increase in fines levied against businesses has been done out of fairness, some business advocacy groups say there is an obvious reason for the increased enforcement in this year.

“With all the revenues that have been lost at the state, they’re looking to make it up wherever they can,” said Michael Lanava, business resource manager for the Worcester Regional Chamber of Commerce.

The JTF’s work shows that either there are more companies not following the laws or the state has become much better at finding them. Noel said it’s a combination of both.

Another part of the increase in fines is because of the state’s comparatively strict standards related to employee classification, according to David Felper, chair of Worcester-based law firm of Bowditch & Dewey.

“Massachusetts has one of the strictest standards in the nation to determine the classification of employees,” he said.

If a worker is classified as an independent contractor, a business does not have to pay for unemployment insurance, worker’s comp and other benefits. That can add up to big savings for a company.

A worker can only be an independent contractor if they perform work outside the regular nature of the business, if the hiring business does not control the way the job is performed and if the laborer considers himself an independent worker. Other states and the federal government have looser definitions.

So, for example, a law firm cannot hire a lawyer and call them an independent contractor, because that is within the purview of what the law firm does. The firm could, however, hire a window washer as an independent contractor.

Skirting on the laws, while it may save money, can hurt employees who lose out on benefits they are guaranteed by law, state officials say.

For some businesses, not complying with these laws is not an issue of purposely misclassifying workers to skirt the law, rather it may have just come down to an honest paperwork error.

That’s what Debbie Ferdella claims happened with her business, Dick & Paul’s Auto Body, a small, family-owned West Boylston Street repair shop in Worcester.

In mid-August Ferdella was sitting at her desk when two investigators from the state came in and asked to see proof of the business’s worker’s compensation insurance.

Ferdella, thinking that she had an up-to-date policy, was surprised by the inquiry.

“I was quite shocked,” she said. “I was under the assumption I had it.”

Her insurance broker, she said, mixed up some paperwork. She thought that her garage liability insurance needed to be renewed, not her worker’s comp. In fact, it was the other way around.

Because of the mix-up, the shop had to close for a week while Ferdella resolved the issue.

While Ferdella said it’s conceivable some businesses may be attempting to skirt worker’s comp laws, she said that was not the case for her.

“This is a minimal line item, in the grand scheme of things,” she said. “It’s not worth it for me to skip out on it.”

Ferdella said instead of slapping the business with a $1,900 fine, as Dick & Paul’s was, the state could have been more sympathetic to the situation. She reinstated the insurance as fast as she could, she claims, but each day she didn’t have a policy the fine grew by $100.

“I think they were a little hard on us,” Ferdella said.

The Good Guys

Power, with Commonwealth Environmental, who was hit with a $900 fine, feels differently. He said he’s happy to see the state cracking down on businesses, even his own. It’s important for him to have a current worker’s comp policy to protect his business in case a worker does get injured. Without worker’s comp, the business could be liable for much larger medical expenses if an accident did happen.

For businesses that are up to date on all of their insurance policies, they’re happy to see the state taking action.

Jim Donlevy, for example, owns a custom granite countertop business on Nashua Street in Worcester and said he’s lost out on customers to other companies that he believes misclassify workers as independent contractors.

While competitors may build the stone or granite to a custom size, they have other workers that install the countertops in clients’ homes.

Some businesses classify the installers as independent contractors so they don’t have to pay worker’s comp, unemployment insurance or benefits for them. Doing so allows them to offer more competitive bids compared to Donlevy, which means he loses out on customers.

“It’s a huge savings (if you don’t pay those costs),” Donley said. “And they’re not independent contractors, they’re employees.”

Donlevy’s happy to see the JTF increase its enforcement: He’d like to see them go even further.

“Ignorance of the law is not an excuse,” he said. “This is part of doing business. You have to know the rules.”

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