Payroll Fraud & Underground Economy

In December 2004, LWP issued a seminal report on the “Social and Economic Costs of Employee Misclassification in Construction” in Massachusetts. The study was one of the first of its kind in the country to analyze the impacts of the growing trend among construction and other employers to fraudulently classify their workers as “independent contractors” instead of “employees” in order to evade the cost of compliance with basic social safety net and tax obligations that attach to the employer-employee relationship, such as minimum wage and overtime obligations, workers compensation contributions, and payroll taxes. The attention generated by the report spawned a series of similar studies at the national and state levels that identified the issue of misclassification as a major public policy concern and catalyzed significant legislative and administrative efforts to combat the misclassification trend.
Since that time, the problems identified in the report have only increased. The tax and insurance avoidance practices have evolved from identifying employees as “1099s” to a harder-to-measure and more hidden system of compensation in the form of simple cash payments “off the books.” They have spread far beyond the construction industry to many additional industries.  Moreover, unscrupulous employers have developed new subterfuges to sidestep existing enforcement strategies.
The Payroll Fraud and Underground Economy Project builds on the 2004 study to provide new research approaches to better detect the presence of classification fraud versus the legitimate use of independent contractors and to develop strategies for enforcement agencies on best practices to address payroll fraud. 

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