PROVIDENCE – Misclassification of workers as independent contractors is a growing problem in the Ocean State, with nearly 10% of Rhode Island employers doing so, according to a report by the University of Massachusetts Amherst Labor Center.
The misclassification saves employers one-third in labor costs, while rendering employees ineligible for social insurance, overtime pay and worker protections, according to the Feb. 18 report. The research was funded by the Rhode Island Foundation for an undisclosed amount on behalf of the Rhode Island AFL-CIO.
The Labor Center’s research report was drafted by Tom Juravich, professor of labor studies and sociology at the University of Massachusetts Amherst, and Russell Ormiston, an associate professor of economics at Allegheny College, based on data provided by the R.I. Department of Labor and Training.
“While there has been anecdotal information about wage theft and misclassification, the purpose of this study was to look at the hard numbers,” Juravich said. “Wage theft and misclassification are growing in Rhode Island, and we need new legislation to curb its spread.”
The report was created from over 3,000 randomly selected unemployment insurance audits conducted between 2016 to 2021. It notes that misclassification saved employers about one-third of their labor costs by not having to pay for taxes, social security, unemployment insurance and workers’ compensation insurance.
According to the report, 9.3% of Rhode Island employers illegally misclassify workers.
That percentage is on the low end of consistent findings in other states that show 10% to 20% of employers misclassify at least one worker as an independent contractor, according to the Economic Policy Institute, a Washington, D.C.-based nonprofit research organization.
But the Rhode Island results do represent a notable increase from a similar review of unemployment insurance audits conducted in the state in 2008. A review of UI audits from 2008 discovered 6% of employers misclassifying at least one worker.
The report states that 20% of employers fail to fully report their workers’ wages and salaries to the Rhode Island DLT.
An estimated $185 million in workers’ wages and salaries went unreported to the DLT in 2019, attributable to both worker misclassification and the failure of firms to fully report the earnings of correctly classified employees.
Between 2019 and 2021, the report said that “DLT investigators charged 180 companies with engaging in worker misclassification that directly affected 740 workers. A substantial majority of these cases — roughly 70% — were within the construction industry. These investigations — which included nearly 100 cases in 2021 alone — establish that worker misclassification is a significant problem in Rhode Island.”
“While this results in higher profits for employers, these actions have real consequences: their workers – now considered independent contractors – are denied their legal rights as employees and left without the most fundamental protections on the job,” stated the report, noting that the result of employee misclassification is wage theft, late payment and fractional pay, putting workers and their families in untenable positions.
In conclusion, the report says that changes in state labor law should include making wage theft a felony. “Under current state law, wage theft is a misdemeanor no matter the dollar amount. This limits prosecutors’ ability to impanel a grand jury, all but eliminating the Attorney General’s subpoena power to compel testimony and authority to request extradition of out-of-state violators.”
“Considering that many employers see the fines and penalties associated with the crime — if they are ever caught in the first place — as simply ‘the cost of doing business,’ it seems unlikely that any meaningful change in labor practices will occur without upgrading wage theft to a felony.”
The report’s authors noted that in 2021, California approved a new law that upgraded wage theft from a misdemeanor to a felony for cases involving at least $950 from one employee or $2,350 from multiple employees over a 12-month period.
Matt Weldon, R.I. DLT director, said the report demonstrates just how pervasive worker misclassification and wage theft are in Rhode Island.
“The department takes these issues very seriously, and we are committed to working with the attorney general’s office to investigate cases of misclassification and hold violating employers accountable,” he said.
Andrew Boardman, a research assistant at Urban Institute, a Washington, D.C.-based nonprofit that conducts economic and social policy research, said that the findings in the report are “not surprising.”
“Often, employers skirt the rules because they can,” he said. “The benefits, higher profits or the ability to undercut competitors, are clear, and when they outweigh the costs, the odds of getting caught and the penalties associated with violations, you can expect unscrupulous actors to exploit that gap.”
Boardman said that what’s driving the apparent increase is that companies are increasingly outsourcing or contracting-out parts of their operations to contractor and subcontractor organizations which, known or unbeknownst to the employer, are skirting the law. “It adds a layer, or several layers, diffusing accountability and complicating enforcement.” he said.
“The report confirms that Rhode Island is experiencing the same trend we see around the country – misclassification is becoming more prevalent across the economy,” he said. “Research at the national level shows existing enforcement strength is often inadequate. Put simply, for many employers, it pays to bend or break workplace laws.”
Boardman, whose work at the institute focuses on labor markets and economic mobility for workers, said that while employee misclassification burdens workers, it also puts pressure on law-abiding employers, undermining Rhode Island’s overall economic resiliency.
“In the big picture, patchy application of the law is harmful to Rhode Island workers and the state’s economy,” said Boardman. “It means less money in workers’ pockets, more barriers to accessing core support programs and protections, and an uneven playing field for employers that do right by their employees.”
The 32-page UMASS Amherst Labor Center report can be found here.
Cassius Shuman is a PBN staff writer. Contact him at Shuman@PBN.com. You may also follow him on Twitter @CassiusShuman.