During the 2006 gubernatorial campaign, candidate Deval Patrick wanted to see firsthand how the underground economy worked. Volunteering to be his guide, Mark Erlich, executive secretary-treasurer of the New England Regional Council of Carpenters, got Patrick boots and a hard hat and took him to job sites in North Reading and Norton, where the future governor talked to workers paid in cash or misclassified as independent contractors.
The experience convinced Patrick that many businesses were operating “off the books” to get around state labor, licensing, and tax laws and that a special type of task force was needed to crack down on the problem. Last March the governor set up the Joint Enforcement Task Force on the Underground Economy and Employee Misclassification, which consists of representatives from 16 state agencies plus the attorney general’s office.
According to George Noel, director of the state Department of Labor and head of the task force, the group sought broad representation because the underground economy crosses so many jurisdictional lines. The Division of Industrial Accidents had tracked just workers’ compensation insurance evasion, while the attorney general focused on wage and hour violations. “Everybody stayed in their lane,” Noel says.
Now their coordinated work is reaping dividends. The task force has hundreds of ongoing investigations and has closed several major cases. Under settlements worked out through the attorney general’s office last fall, Lillian Gately and her company, Medford’s L&H Construction, agreed to provide restitution to workers after failing to pay them lawful wages on public construction projects at several Boston–area schools and housing authorities. A Virginia drywall company owner and his company must pay $10,000 in civil penalties for misclassifying 17 workers as independent contractors.
Protecting workers is the chief goal of the task force, but collecting lost tax revenues is also a powerful motivator. Since payroll taxes go toward compensating the unemployed, any misclassification depletes those funds. A 2004 Harvard study estimated that between 2001 and 2003 Massachusetts lost between $12.5 million and $35 million in unemployment taxes to the underground economy.
With the word on the street that officials have ramped up enforcement, noncompliant employers may be adopting evasive strategies. Erlich says that some employers are carrying insufficient workers’ compensation insurance: They purchase a policy covering one or two office workers but not those in the field. Erlich says the Division of Industrial Accidents has the power to issue stop-work orders against companies that don’t have insurance, but it lacks the statutory authority to verify whether a policy actually covers all the workers.
Companies are “papering themselves up,” says Erlich. “Now you have to peel the next layer of the onion,” he says.
