June 3, 2010

   Sen. Christopher B. Maselli, 401-276-5594

Senate passes bill to tighten employee classification laws

‘Underground economy’ costing state millions annually

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

An 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 are part of the underground economy, costing the state as much as $50 million annually in uncollected income taxes, unemployment insurance, temporary disability insurance and worker’s compensation premiums.

Following a year-long study, a special joint legislative commission offered recommendations to 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, 2010-S 2334A, was approved in the Senate this week. A companion bill in the House of Representatives, 2010-H 7092, is currently before the House Committee on Labor.

The legislation was sponsored by Sen. Christopher B. Maselli (D-Dist. 25, Johnston) and Rep. Arthur J. Corvese (D-Dist. 55, North Providence), who co-chaired the Special Joint Commission to Study the Underground Economy and Employee Misclassification. The commission found 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 deprives the state of millions of dollars in uncollected tax revenues and insurance premiums and puts honest, law-abiding employers at a significant competitive disadvantage to employers who cheat the system.

The Maselli bill passed by the Senate today addresses several of the commission’s prime goals, among them to develop a unified statutory definition of the terms “employee” and “independent contractor,” to modify the filing procedures for independent contractor status, and to ensure that the business and labor communities are well educated by the state about the employee classification law.

The bill clarifies the definition of employee in the workers’ compensation and unemployment benefits context, requires registration with the Department of Labor and Training of all independent contractors and the entities that hire them, expands the tools used to detect and limit the misclassification of employees and permits sharing of information by and between state departments to encourage enforcement.

“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,” said Senator Maselli. “As a result, the burdens placed on employers who play by the rules are increased. And the cost for the misclassified employees themselves are also high, as they may not qualify for certain benefits, such as unemployment and workers’ compensation insurance.”

“Enactment of this legislation is the most immediate step toward improving state enforcement, and reducing instances of employee misclassification and the prevalence of the underground economy,” said Senator Maselli.

            (A similar Senate bill introduced late in the 2009 session was passed by the Senate but not taken up by the House committee to which it was subsequently referred. A companion 2009 House bill was also introduced but not heard in committee before the session ended.)

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