Employee Misclassification Costing RI Millions

Providence, RI (CompNewsNetwork) - Even at a very conservative estimate of 1 percent employee misclassification in Rhode Island (individuals working off the books, getting paid under the table, etc.), the state may have lost more than $12 million last year.

A weighted average of 10 states that have calculated their percentage of misclassified employees (including Massachusetts and Connecticut) suggests that potentially 6.1 percent of Rhode Island employees were misclassified in the last fiscal year, costing the state as much as $50 million in uncollected income taxes, unemployment insurance, temporary disability insurance and worker's compensation premiums.

A special joint legislative commission, in a final report issued today, is offering recommendations it believes will improve enforcement measures, close statutory loopholes and increase government outreach and public awareness of new and current employment laws for businesses.

Legislation based on those recommendations is expected to be introduced today and considered before the Assembly closes its session this year.

Formed at the beginning of this legislative year, the Special Joint Commission to Study the Underground Economy and Employee Misclassification undertook the study in an attempt to determine the most reasonable and effective means to prevent the misclassifying of employees and to improve compliance enforcement in the state of Rhode Island.

Co-chaired by Sen. Christopher B. Maselli (D-Dist. 25, Johnston) and Rep. Arthur J. Corvese (D-Dist. 55, North Providence), the commission concluded in its final report that "misclassifying employees as independent contractors, or paying them on an ‘under the table' cash basis wrongly deprives employees of the protection of worker's compensation, unemployment insurance, and wage and labor laws." It also, they concluded, deprives the state of millions of dollars in uncollected tax revenues and insurance premiums and puts honest, law-abiding employers at significant competitive disadvantage to employers who cheat the system.

Employers who misclassify their employees as independent contractors avoid paying Social Security, unemployment and income taxes, as well as required worker's compensation and temporary disability insurance premiums. As a result, the burdens placed on employers who play by the rules are increased.

The study commission said the recommendations offered in the final report – the result of eight hearings spanning five months – can decrease the incidence of employee misclassification and improve the enforcement of wage and labor law in the state.

The commission's findings and resulting legislative proposals are:

1) Develop a unified statutory definition of the terms "employee" and "independent contractor."

The commission found that while there are thousands of individuals working in the state who function in an independent capacity, evidence and experiences in other states suggest that many workers who classify themselves as independent contractors are, in fact, employees but have chosen to, or have been persuaded to, register as independent contractors.

The legislation to be introduced calls for replacing current statutory definitions of independent contractor with a three-level test definition, with all applicants required to meet the first listed definition and one of the two remaining definitions.

The first part of the definition (required by all) is that "the person is free from control and direction in connection with the performance of the service, both under his or her contract for the performance of service."

The next two definitions are: The service is performed either outside the usual course of the business for which the service is performed or outside of all the places of business of the enterprise for which the service is performed; The person is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

2) Modify filing procedures for independent contractor status.

Because there are no established criteria or financial commitment involved when filing as an independent contractor, individuals who clearly meet the standard of an employee are able to incorrectly file as independent.

The legislation to be introduced will call for replacing the current independent contractor filing with a new process. It will require an annual registration fee of $100 for any person, firm or corporation identifying themselves or itself as an independent contractor, or for any firm, corporation or business hiring an entity identifying itself as an independent contractor. The registration will be public record and any person or corporation failing to register will face a misdemeanor violation, subject to a fine of between $500 and $1,000 for each offense, as well as imprisonment for between 10 and 90 days.

The final report and introduction of the legislation – in the House by Representative Corvese and in the Senate by Senator Maselli – will not conclude the work of the panel. The commission is proposing extending its life in order to monitor the implementation and effectiveness of the legislation once it is enacted into law.

The commission wrote, in the final report, that it considers enactment of the recommendations "the most immediate step toward improving state enforcement, and reducing instances of employee misclassification and the prevalence of the underground economy."

Other members of the commission are:

Sen. David E. Bates (R-Dist. 32, Barrington, Bristol); Rep. Douglas W. Gablinske (D-Dist. 68, Bristol, Warren); Rep. Brian C. Newberry (R-Dist. 48, North Smithfield, Burrillville); Judge George Healy of the Workers' Compensation Court; David Sullivan of the RI Division of Taxation; Matt Carey of the Department of Labor and Training; Paul Pallozzi of the Department of Business Regulation; David Burnham of the RI Independent Contractors and Associates; Steven LaBrie of Teamsters Local Union 251; Michael D. Lynch of Beacon Mutual Insurance; Terrance S. Martiesian of Martiesian & Associates; George H. Nee of the RI AFL-CIO, and David Palmisciano of Carpenters' Union Local 94.

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