A team of five Connecticut labor department employees issued 220 stop-work orders during the past 22 months in their efforts to stop employee misclassification and “under-the-table” cash payments. That’s nearly 200 more stop-work orders than the number issued by New York and Massachusetts.
However, the state lags significantly behind in the collection of back taxes compared with neighboring states that have developed a comprehensive, multi-agency approach to tackling the problem.
New York has taken the lead in the Northeast in its battle against the underground economy, establishing its task force in September 2007. It has identified more than $4.8 million in unpaid unemployment taxes, issued more than $1 million in unemployment insurance fraud penalties, and issued more than $1.1 million in workers’ compensation fines and penalties. The task force also discovered more than $12 million in unpaid wages.
Notably, New York’s crackdown included just 27 stop-work orders. But it collects much more in fines and back taxes because each order triggers additional action not generally taken in Connecticut.
Key to New York’s success was coordinated enforcement sweeps, coordinated assignments and systematic referrals and data sharing between 15 state agencies.
Massachusetts, which modeled its task force after New York’s, reported in June that it had “recovered” $1.4 million in fines, unpaid wages and tax assessments within its first 12 months. Its collection of fines associated with workers’ compensation was $24,750, less than a third of the $90,000 collected by Connecticut. However, Massachusetts collected about $238,000 in unpaid taxes.
Although Connecticut’s labor department makes referrals to the appropriate federal and state agencies when stop-work orders are issued, the state is not tracking tax collections related to worker misclassification enforcement efforts. Tax collection is the responsibility of the state’s Department of Revenue.
Unlike Massachusetts and New York, Connecticut hasn’t adopted a multi-agency enforcement task force. But lawmakers did pass a law that became effective July 2008 that authorized the establishment of a Workers Misclassification Advisory Board — all volunteer — to be comprised of five state agencies and various construction management and labor representatives.
Connecticut’s board met once, on Jan. 16.
In February, Gov. M. Jodi Rell proposed that the Employee Misclassification Advisory Board — along with 70 state boards and commissions — be eliminated. Rell’s office did not return a request for comment as of press time.
Donald Shubert, president of the Connecticut Construction Industries Association, was appointed to the board and attended its first and only meeting. Shubert said that Chief State’s Attorney Kevin Kane, who heads the state’s workers’ compensation fraud bureau, Attorney General Richard Blumenthal and labor department Commissioner Patricia Mayfield were very engaged during the meeting.
Unclear as to why the board has not met again, he said his organization considers enforcement very important. And while his organization applauds and respects the job that the state’s labor department is doing with very limited resources, more enforcement is needed, he said.
“This is an investment in state government that more than pays for itself in more than one way,” said Shubert. “We would strongly encourage Connecticut to follow [Massachusetts’ and New York’s’] lead.”
To Massachusetts, its task force has been well worth it. “This is really found money,” said George Noel, director of labor in Massachusetts, who referred to its recovery of more than $1 million during its first year starting up.
And there’s more money that could be found, according to numerous studies. Economist William Alpert, a University of Connecticut professor, estimates that the state could be losing up to $1.5 billion in state income tax revenue alone from employee misclassification and workers being paid off the books.
“I feel that what we are working with, we have really started to make an impact. We are a unit of five, but that is not only what we do,” said Resa Spaziani, a DOL supervisor who heads the state’s stop-work order efforts. She noted that some of the five involved with stop-work orders also have caseloads of 150 to 200 pertaining to other matters.
Prior to launching its task force, Massachusetts dedicated about 11 labor department employees part time on workers misclassification and off-the-books enforcement. That number grew to 122 state employees when the task force was established.
George Noel, director of the Massachusetts Department of Labor, said the key to its enforcement success is its collaboration. “We break down the silos, work with each other.”
The task force developed a shared database where complaints are input. It also developed a check list that helps the members readily identify which tax laws, labor license regulations, and other laws may be violated, he said.
The Massachusetts collaboration has revealed that businesses not complying with one labor law are likely to violate other labor laws as well, Noel said.
The task force’s most powerful compliance tool is its threat to pull a state-issued license, which allows the task force to leverage its power over compliance with other state agencies pretty quickly, he added.
The fines and penalties also increase substantially when multi-agency regulations are considered, he added. Some businesses make a conscious business decision to not comply with labor laws and consider the risk of getting caught and paying one fine simply the cost of doing business.
“But when you have to pay back unemployment taxes, income taxes, all kinds of back taxes, it increases the price of poker,” Noel added.
Other states — Vermont, Maine, and New Hampshire — are looking at same model, Noel said, and will come together for a conference in October in Holyoke, Mass.
